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EX-21 - EXHIBIT 21 - NATURAL ALTERNATIVES INTERNATIONAL INCex_282929.htm
 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

ANNUAL REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2021

 

000-15701

(Commission file number)

 


NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

84-1007839

(State of incorporation)

(IRS Employer Identification No.)

   

1535 Faraday Ave

Carlsbad, CA 92008

(760) 744-7700

(Address of principal executive offices)

(Registrants telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of exchange on which registered

Common Stock, $0.01 par value per share

Nasdaq Global Market

 

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

NAII

Nasdaq Stock Market

 

Indicate by check mark if Natural Alternatives International, Inc. (NAI) is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.   ☐  Yes    ☒  No

 

Indicate by check mark if NAI is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.   ☐  Yes    ☒  No

 

Indicate by check mark whether NAI (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒  Yes     ☐  No

 

Indicate by check mark whether NAI has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit such files).   ☒  Yes     ☐  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of NAI’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☐

 

 

Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

 

Large accelerated filer         ☐

Accelerated filer                           ☐

Emerging Growth Company            ☐

     

Non-accelerated filer           ☐

Smaller reporting company          ☒

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ☐  Yes    ☒  No

 

The aggregate market value of NAI’s common stock held by non-affiliates of NAI as of the last business day of NAI’s most recently completed second fiscal quarter (December 31, 2020) was approximately $50,488,386 (based on the closing sale price of $10.59 reported by Nasdaq on December 31, 2020).

 

As of September 17, 2021, 6,434,902 shares of NAI’s common stock were outstanding, net of 2,569,463 treasury shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI’s definitive proxy statement, to be filed on or before October 28, 2021, for its Annual Meeting of Stockholders to be held December 3, 2021.

 



 

 

 

TABLE OF CONTENTS

 

   

Page 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

1

     

PART I 

   
     

Item 1.

Business

2

     

Item 1A.

Risk Factors

8

     

Item 2.

Properties

15

     

Item 3.

Legal Proceedings

15

     

Item 4.

Mine Safety Disclosures

15

     

PART II

   
     

Item 5.

Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

     

Item 6.

Selected Financial Data

16

     

Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

17

     

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

20

     

Item 8.

Financial Statements and Supplementary Data

21

     

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

45

     

Item 9A.

Controls and Procedures

45

     

Item 9B.

Other Information

45

     

PART III

   
     

Item 10.

Directors, Executive Officers and Corporate Governance

45

     

Item 11.

Executive Compensation

45
     

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

45

     

Item 13.

Certain Relationships and Related Transactions, and Director Independence

45

     

Item 14.

Principal Accountant Fees and Services

45

     

PART IV

   
     

Item 15.

Exhibits and Financial Statement Schedules

45

   

SIGNATURES

48

 

 

 
 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs, or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “believe,” “anticipate,” “intend,” “estimate,” “approximate,” “predict,” “forecast,” “project,”, “future”, or “likely”, or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism or pessimism about future operating results, are forward-looking statements. Forward-looking statements in this report may include statements about:

 

 

the impact, of the Covid-19 Pandemic (“COVID-19”) and other external factors both within and outside of our control, on our business and results in operations including variations in our quarterly net sales , our employees, supply chain, vendors and customers;

 

future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, and other financial items;

 

our ability to maintain or increase our patent and trademark licensing revenues;

 

our ability to develop market acceptance for and increase sales of new products, develop relationships with new customers and maintain or improve existing customer relationships;

 

inventory levels, including the adequacy of quality raw material and other inventory levels to meet future customer demand, in particular assumptions regarding the impact of the COVID-19 pandemic;

 

our ability to protect our intellectual property;

 

future economic and political conditions, including implementation of new or increased tariffs;

 

our ability to improve operating efficiencies, manage costs and business risks, and improve or maintain profitability;

 

currency exchange rates and their effect on our results of operations (including amounts that we may reclassify as earnings), the availability of foreign exchange facilities, our ability to effectively hedge against foreign exchange risks and the extent to which we may seek to hedge against such risks;

 

the outcome of litigation, regulatory and tax matters we may become involved in, the costs associated with such matters and the effect of such matters on our business and results of operations;

 

sources, availability and quality of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;

 

the future adequacy and intended use of our facilities;

 

potential manufacturing and distribution channels, product returns, and potential product recalls;

 

future customer orders;

 

the impact of external factors on our business and results of operations, especially, for example, variations in quarterly net sales from seasonal and other external factors;

 

our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good Manufacturing Practices (GMPs);

 

our ability to successfully expand our operations, including outside the United States (U.S.);

 

the adequacy of our financial reserves and allowances;

 

the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our working capital and capital expenditure needs through the next 12 months and longer;

 

the impact of accounting pronouncements and our adoption of certain accounting guidance; and

 

other assumptions described in this Report underlying or relating to any forward-looking statements.

 

The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that are or may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identify certain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part I and elsewhere in this report, as well as in other reports and documents we file with the United States Securities and Exchange Commission (SEC).

 

 

PART I

ITEM 1. BUSINESS

 

General

 

Our vision is to enrich the world through the best of nutrition.

 

We are a leading formulator, manufacturer and marketer of nutritional supplements. Our comprehensive strategic partnerships with our customers allow us to offer a wide range of innovative nutritional products and services to such customers including: scientific research, clinical studies, proprietary ingredients, customer-specific nutritional product formulation, product testing and evaluation, marketing management and support, packaging and delivery system design, regulatory review, and international product registration assistance.

 

As our primary business activity, we provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbal and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. We also own a patent estate related to the raw material ingredient known as beta-alanine, which is primarily commercialized through the direct sale of this raw material and supply agreements with third parties for the distribution and use of this raw material under our CarnoSyn® and SR CarnoSyn® trademarks.

 

History

 

Originally founded in 1980, Natural Alternatives International, Inc. (NAI) reorganized as a Delaware corporation in 1989. Our principal executive offices are located at 1535 Faraday Ave, Carlsbad, CA 92008. Our primary U.S. manufacturing facility is located approximately three miles away in Vista, California. We also purchased a new manufacturing and warehousing facility on August 20, 2021 located approximately one mile away from our executive offices in Carlsbad, CA.

 

In January 1999, we formed our wholly owned subsidiary Natural Alternatives International Europe S.A. (NAIE), a Swiss corporation, and our wholly-owned subsidiary, based in Manno, Switzerland. In September 1999, NAIE opened its manufacturing facility in Manno, Switzerland, which has grown over the ensuing years and currently possesses manufacturing capabilities in encapsulation, powders, tablets, finished goods packaging, quality control, laboratory testing, warehousing, distribution and administration.

 

In 1997, we licensed certain patent rights related to instant-release beta-alanine and have since expanded this patent estate by applying for and obtaining patents to include sustained-release beta-alanine. We sell these products under our trademarks CarnoSyn® and SR CarnoSyn®. As part of our business strategy, we have sought to commercialize our CarnoSyn® patent estate through contract manufacturing, royalty and license agreements. We directly sell CarnoSyn® and SR CarnoSyn® and license our related patent and trademark rights to others for use in or with their products.

 

Unless the context requires otherwise, all references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable NAIE.

 

Overview of our Facilities and Operations

 

Our U.S.-based operations are located in Vista and Carlsbad, California and include manufacturing and distribution, sales and marketing, in-house formulation, laboratory, and other research and development services. Our Vista manufacturing facilities were recertified on November 8, 2016 by the Therapeutic Goods Administration (TGA) of Australia after its audit of our GMP’s. TGA evaluates new therapeutic products, prepares standards, develops testing methods and conducts testing programs to ensure that products are high in quality, safe and effective. TGA also conducts a range of assessment and monitoring activities including audits of the manufacturing practices of companies who export and sell products to Australia. TGA certification enables us to manufacture products for export into countries that have signed the Pharmaceutical Inspection Convention, which include most European countries as well as several Pacific Rim countries. TGA certifications are generally reviewed every eighteen to thirty six months. During August 2016, TGA completed an inspection of our facilities and quality systems for compliance with good manufacturing practices, and a renewed GMP clearance was issued to NAI that would have expired on August 3, 2020. However, due to the COVID-19 pandemic, TGA overseas GMP inspections have been suspended. NAI’s GMP Certification and authorization to manufacture product for Australia remains in place and our TGA clients are advised to file for clearance extensions every 6 months to ensure supply is not interrupted.

 

Our Vista facilities also have been awarded GMP registration annually since October 2002 by NSF International (NSF) through the NSF Dietary Supplements Certification Program and received “GMP for Sport” NSF Certified registration on February 16, 2009. GMP requirements are regulatory standards and guidelines setting forth necessary processes, procedures and documentation for manufacturers in an effort to assure the products produced by that manufacturer have the identity, strength, composition, quality and purity represented. The NSF Certified for Sport program focuses on minimizing the risk that a dietary supplement or sports nutrition product contains banned substances and was developed due to growing demand from athletes and coaches concerned about banned substances in sports supplements. The program focuses primarily on manufacturing and sourcing processes, while embedding preventative measures throughout. NAI’s participation in the program allows us to produce products bearing the NSF Sport logo.

 

Our Vista operations have also been certified by Health Canada as compliant with the GMP requirements outlined in Part 3 of the Canadian Natural Health Products Regulations. Health Canada is the department of the Canadian government with responsibility for national public health. Health Canada has initiated work to modernize its regulatory system for food and health products. Health Canada plays an active role in ensuring access to safe and effective drugs and health products while giving high priority to public safety and strives to provide information needed to make good choices and informed decisions regarding one’s health. NAI was issued its initial certification by Health Canada in December 2011 and received its most recent renewal in November 2019, which is valid until December 2022. This approval demonstrates another level of regulatory compliance by NAI, and may also ease the approval process for our customers who import products into Canada.

 

 

During March 2015, our Vista California facility became certified as an Organic Processor and Handler by Natural Food Certifiers (NFC). This certification demonstrates our facility meets the USDA National Organic Program standards and allows our contract manufacturing and packaging services to include products labeled as Organic. The certification requires annual renewal and was last renewed in October 2020. We are registered with the State of California, Department of Public Health Food and Drug Branch as an organic processor. Additionally, we are certified by various Rabbinical and Halal authorities to produce Kosher and Halal certified products. These certifications guarantee the manufacturing facility and processes for, and the ingredients of, certified products have been reviewed and found to be in compliance with the strict dietary laws of the respective Jewish and Muslim communities.

 

In April 2021, NAI became the first company to meet new safety and benchmarking standards created by the Supplement Safety & Compliance Initiative (SSCI). The SSCI is an industry-driven initiative led by retailers to provide a harmonized benchmark to recognize various safety standards throughout the entire dietary supplement supply chain. Patterned after the Global Food Safety Initiative (GFSI), which has been very successful in implementation across the grocery marketplace and food retail sectors, the program is focused on improved traceability and identification protocols to provide maximum safety for end users. SSCI key objectives include creating effective global systems to ensure traceability, transparency, and quality in the supply chain; reducing risks by ensuring equivalence between safety management systems’ and driving global change through benchmarking of domestic and international quality standards.

 

On August 20, 2021, NAI acquired a new manufacturing and warehouse facility in Carlsbad, California that is scheduled to be retrofitted to become a dedicated high volume powder blending and packaging facility while also providing additional raw material storage capacity. The building improvements to allow for these capabilities are expected to be completed in late fiscal year 2022 and all such construction is expected to be in compliance with GMP requirements. We are currently evaluating which of the above referenced additional certifications will be necessary for this new facility and will be dependent on types of products and customers we will service out of this facility. 

 

NAIE operates a manufacturing, warehousing, packaging and distribution facility in Manno, Switzerland. In January 2004, NAIE obtained a pharmaceutical license from the Swissmedic Authority of Bern, Switzerland to process pharmaceuticals for packaging, import, export and sale within Switzerland and other countries. In March 2007, following the expansion of NAIE’s manufacturing facilities to include powder filling capabilities, NAIE obtained an additional pharmaceutical license from the Swissmedic Authority certifying that NAIE’s expanded facilities conform to their GMPs. In January 2013, following the additional upgrade of NAIE’s manufacturing facilities to include the manufacture of pharmaceuticals, NAIE obtained an additional pharmaceutical approval from the Swissmedic Authority certifying that NAIE’s upgraded facilities conform to GMP. We believe these licenses and NAIE’s manufacturing capabilities help strengthen our relationships with existing customers and improve our ability to develop relationships with new customers. NAIE's last Swissmedic inspection was conducted in August 2020 and the renewed certification was issued in October 2020.

 

In March 2019, the Japanese Minister of Health, Labor, and Welfare approved beta-alanine for use in Japanese food products. We have partnered with Shimizu Chemical Corporation of Hiroshima Japan to provide exclusive distribution of our CarnoSyn® and SR CarnoSyn® beta-alanine in Japan.

 

Business Strategy

 

Our goals are to achieve long-term growth and profitability and to diversify our sales base. To accomplish these goals, we have sought, and intend to continue to seek, to do the following:

 

 

leverage our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers and to assist in developing relationships with additional quality oriented customers;

 

 

expand the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities, and license and royalty agreements while protecting our proprietary rights;

 

 

improve operational efficiencies and manage costs and business risks to improve profitability.

 

Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our customer’s nutritional supplements and their adherence to label claims through education provided by direct sales and direct-to-consumer marketing programs. We believe our GMP and TGA certified manufacturing operations, science-based product formulations, peer-reviewed clinical studies and regulatory expertise collectively provide us with a sustainable competitive advantage and provide our customers with a high degree of confidence in the products we manufacture.

 

While today’s consumer may have access to a variety of information, we believe many consumers remain uneducated about nutrition and nutritional supplementation, uncertain about the relevance or reliability of the information available to them, or confused about conflicting claims or information. We believe this state of the market creates a significant opportunity for the direct sales marketing channel. The direct sales marketing channel has proved, and we believe will continue to prove, to be a highly effective method for marketing high-quality nutritional supplements because it allows associates or other individuals to educate consumers on the benefits of science-based nutritional supplements. Our largest customers operate in the direct sales marketing channel. Thus, the majority of our business has relied primarily on the effectiveness of our customers in this marketing channel.

 

We also believe there is significant opportunity with the commercialization of our patent estate through the introduction of CarnoSyn® and SR CarnoSyn® beta-alanine into additional markets and with the introduction of new beta-alanine product offerings. Currently, a majority of our sales of CarnoSyn® are to companies that operate in the sports nutrition channel and are focused on products containing the instant release form of beta-alanine. We believe there are several other markets and distribution channels that represent growth opportunities for the distribution of CarnoSyn® and SR CarnoSyn® beta-alanine. We believe SR CarnoSyn® is a superior delivery system of CarnoSyn® beta-alanine based on its sustained release profile that allows for increased daily dosing and improved muscle retention of carnosine. We believe SR CarnoSyn® beta-alanine is a vital component in the further commercialization of our patent estate outside of the sports nutrition channel. As part of this commercialization effort we launched a SR CarnoSyn® tablet product called Perfect Synergy® under a brand we created called SustainedRx®. This product is currently exclusively offered through Amazon and is marketed as a Health & Wellness product. In addition, we are actively working on the development of an SR CaronSyn® powder that we believe will provide more opportunities in the marketplace. Our patents related to instant release beta-alanine extend through 2026 and our patents for SR CarnoSyn® extend through 2036.

 

 

We believe our comprehensive approach to customer service is unique within our industry. We believe this comprehensive approach, together with our commitment to high quality, product development and manufacturing capabilities, will provide the means to implement our strategies and achieve our goals. There can be no assurance, however, that we will successfully implement any of our business strategies or that we will increase or diversify our sales, successfully commercialize our patent estate, or improve our overall financial results.

 

Products, Principal Markets and Methods of Distribution

 

Our primary business activity is to provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Our private-label contract manufacturing customers include companies that market nutritional supplements through direct sales marketing channels, direct to consumer ecommerce channels, and retail stores. We manufacture products in a variety of forms, including capsules, tablets, chewable wafers, and powders to accommodate a variety of our customer’s preferences.

 

We provide strategic partnering services to our private-label contract manufacturing customers that include but are not limited to the following:

 

 

customized product formulation;

 

clinical study design and support;

 

manufacturing;

 

marketing support;

 

international regulatory and label law compliance;

 

international product registration; and

 

packaging in multiple formats and labeling design.

 

We also seek to commercialize our patent and trademarks through the direct distribution and sale of CarnoSyn® and SR CarnoSyn®, new contract manufacturing opportunities, and various license, royalty, and similar arrangements.

 

For the last two fiscal years ended June 30, our net sales were derived from the following (in thousands):

 

   

2021

   

2020

 
    $    

%

    $    

%

 

Private-label Contract Manufacturing

  $ 164,310       92     $ 106,291       89  

Patent and Trademark Licensing

    14,210       8       12,585       11  

Total Net Sales

  $ 178,520       100     $ 118,876       100  

 

Research and Development

 

We are committed to quality research and development. We focus on the development of new science-based products and the improvement of existing products. We periodically test and validate our products to help ensure their stability, potency, efficacy and safety. We maintain quality control procedures to verify that our products comply with applicable specifications and standards established by the FDA and other regulatory agencies. We also both direct and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of an ingredient or a product and provide scientific support for product claims and marketing initiatives. We believe our commitment to research and development, as well as to our facilities and strategic alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality and innovative products.

 

As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not always engaged to perform, certain research and development activities related to the development or improvement of their products. Our customers are usually charged for these services but are often reimbursed for these costs if their products are ultimately commercialized and manufactured by NAI. Research and development costs, including costs associated with international regulatory compliance services we provide to our customers, are expensed as incurred.

 

Our research and development expenses for the fiscal year ended June 30, 2021 were $1.9 million, compared to $1.8 million for the fiscal year ended June 30, 2020.

 

Sources and Availability of Raw Materials

 

We use many raw materials in our operations including powders, excipients, empty capsules, and components for packaging and distributing our finished products. In addition, the commercialization of our beta-alanine patents and trademarks depends on the availability of the raw material beta-alanine. We conduct identity testing for all raw materials we purchase and, on a predetermined testing protocol basis we evaluate raw materials to ensure their quality, purity and potency before we use them in our or our customer’s products. We typically buy raw materials in bulk from qualified vendors located both within and outside the U.S.

 

Like many companies and industries, we experienced challenges within our supply chain as a result of the affects of the COVID-19 pandemic. In particular, we encountered difficulties related to the supply of raw materials and packaging components. These challenges were driven by, but were not limited to, increased demand for certain ingredients with a limited supply, our supplier’s inability to meet demand due to capacity constraints, and increased lead times associated with constrained transportation availability. While we were able to manage these circumstances in fiscal 2021 by working closely with our customers and suppliers, there continues to be significant pricing pressures and supply chain challenges associated with various raw materials and packaging components. Additionally, there still remains uncertainty related to existing and potentially increased tariffs. Throughout fiscal 2022, we expect upward pricing pressures for raw materials, packaging components, and other costs will continue as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and the potential levy of tariffs on goods we import from overseas, including beta-alanine.

 

 

Customers

 

We have two private-label contract manufacturing customers that each individually represent more than 10% of our consolidated net sales. The loss of either of these customers could result in a significant negative impact to our financial position and results of operations. We continue to focus on obtaining new private-label contract manufacturing customers to reduce the risks associated with deriving a significant portion of our sales from a limited number of customers.

 

Competition

 

We compete with other manufacturers, distributors and marketers of vitamins, minerals, plant extracts, and other nutritional supplements both within and outside the U.S. The nutritional supplement industry is highly fragmented and competition for the sale of nutritional supplements comes from many sources. These products are sold primarily through retailers (drug store chains, supermarkets, and mass market discount retailers), health and natural food stores, and direct sales channels (network marketing and internet sales).

 

We believe private-label contract manufacturing competition in our industry is based on, among other things, customized services offered, product quality and safety, innovation, price and customer service. We believe we compete favorably with other companies because of our ability to provide comprehensive solutions for customers, our certified manufacturing operations, our commitment to quality and safety, and our research and development activities.

 

Our future competitive position for private-label contract manufacturing and patent and trademark licensing will likely depend on, but not be limited to, the following:

 

 

the continued acceptance of our products by our customers and consumers;

 

 

our ability to protect our proprietary rights in our patent estate and the continued validity of such patents;

 

 

our ability to successfully expand our product offerings related to our patent and trademark estate;

 

 

our ability to maintain adequate inventory levels to meet our customer’s demands;

 

 

our ability to continue to manufacture high quality products at competitive prices;

 

 

our ability to attract and retain qualified personnel;

 

 

the effect of any future governmental regulations on our products and business;

 

 

the results of, and publicity from, product safety and performance studies performed by governments and other research institutions;

 

 

the continued growth of the global nutrition industry; and

 

 

our ability to respond to changes within the industry and consumer demand, financially and otherwise.

 

The nutritional supplement industry is highly competitive and we expect the level of competition to remain high over the near term. We do not have sufficient information to accurately estimate the total number or size of our competitors.

 

Government Regulation

 

Our business is subject to varying degrees of regulation by a number of government authorities in the U.S., including the FDA, the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various state and local agencies in areas where we operate and in which our products are sold also regulate our business, such as the California Department of Health Services, Food and Drug Branch. The areas of our business regulated by both these and other authorities include, among others:

 

 

product claims and advertising;

 

 

product labels;

 

 

product ingredients;

 

 

how we manufacture, package, distribute, import, export, sell and store our products; and

 

 

our classification as an essential business and our right to continue operations during government shutdowns.

 

The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamins and other nutritional supplements in the U.S., while the FTC regulates marketing and advertising claims. Under FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP’s to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by the FDA and believe we are currently operating within the FDA mandated GMP.

 

 

The FDA also regulates the labeling and marketing of dietary supplements and nutritional products, including the following:

 

 

the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling;

 

 

requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support;

 

 

labeling requirements for dietary supplements or nutritional products for which “high potency” and “antioxidant” claims are made;

 

 

notification procedures for statements on dietary supplements or nutritional products; and

 

 

premarket notification procedures for new dietary ingredients in nutritional supplements.

 

The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and re-defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietary substances. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurate information about such products. The FDA is generally prohibited from regulating active ingredients in dietary supplements as drugs unless product claims about such supplements trigger regulatory status, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady.

 

In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (the “2006 Act”) was passed, and further revised the provisions of the Federal Food, Drug and Cosmetic Act. Under the 2006 Act, manufacturers, packers or distributors whose name appears on the product label of a dietary supplement or nonprescription drug are required to include contact information on the product label for consumers to use in reporting adverse events associated with the product’s use and to notify the FDA of any serious adverse event report. Events reported to the FDA are not considered an admission from a company that its product caused or contributed to the reported event. We believe we are in compliance with the 2006 Act and we are committed to meeting or exceeding the requirements of the 2006 Act.

 

We are also subject to a variety of other regulations in the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that being in compliance will not become prohibitively costly to our business.

 

Our operations outside the U.S. are similarly regulated by various agencies and entities in the countries in which we operate and in which our products are sold. The regulations of these countries may conflict with those in the U.S. and may vary from country to country. The sale of our products in certain European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the European Union. In other markets outside the U.S., we may be required to obtain approvals, licenses or certifications from a country’s Ministry of Health or comparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on reformulation of our products for a particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to enter, or continue to operate in certain markets outside the U.S. As with the costs of regulatory compliance in the U.S., foreign regulations require significant financial and operational resources to ensure compliance, and we cannot provide assurances we will always be in compliance despite our best efforts to do so or that being in compliance will not become prohibitively costly to our business. Our failure to maintain regulatory compliance within and outside the U.S. could impact our ability to sell our products and thus, adversely impact our financial position and results of operations.

 

Intellectual Property

 

Trademarks. We have developed and use trademarks in our business, particularly relating to corporate, brand and product names. We own 49 trademark registrations; including 14 registrations in the U.S. Six of these U.S. registrations are incontestable. Federal registration of a trademark in the United States affords the owner nationwide exclusive trademark rights in the registered mark and the ability to prevent subsequent users from using the same or similar mark. However, to the extent any other business operator has acquired trademark rights in a mark by its consistent use of such mark in connection with similar goods or services in a particular geographic area, the nationwide rights conferred by federal registration can be subject to that user’s prior established non-statutory (“Common Law”) rights in that geographic area. In addition, rights in a registered mark are dependent upon the continued use of the mark in connection with the goods and/or services set forth in the registration.

 

We have 35 foreign trademark registrations covering 41 countries including registrations for CarnoSyn and SR CarnoSyn in Australia, Brazil, Canada, China, Cuba, the European Union Intellectual Property Office, Hong Kong, Israel, Japan, Mexico, New Zealand, Poland, and South Korea. Registrations have also been obtained for CarnoSyn® and the SR CarnoSyn® logos in Switzerland. We currently have two U.S. trademark applications pending and three International applications pending. We also claim common law ownership and protection of certain unregistered trademarks and service marks based upon our continued use of the marks under common law. In some countries, such as the United States, Common Law offers protection of a mark within the particular geographic area in which it is continually and deliberately used.

 

We believe our registered and unregistered trademarks constitute valuable assets, adding to the recognition of our products and services in the marketplace. These and other proprietary rights have been and will continue to be important in enabling us to compete; however, we cannot provide assurances our current or future trademark applications will be granted or our current trademarks or registrations will be maintained.

 

 

Trade Secrets. We own certain intellectual property, including trade secrets, which we seek to protect, in part, through confidentiality agreements with employees and other parties. We regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, and we rely on a combination of trade secrets, contract, patent, copyright and trademark law (including established but non-statutory law) to establish and protect the rights in our products and technology. The laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S.

 

Patents and Patent Licenses. We currently own eleven U.S. patents and 20 corresponding patents registered in countries throughout North America, Europe and Asia. We also have pending applications in several countries. All of these patents and patent rights relate to the ingredient known as beta-alanine. Certain of these patents were assigned to NAI and we make certain ongoing royalty payments to the prior owners of the patents. The royalty payments and licenses are expected to continue until the expiration of the patents. We also sell beta-alanine, and license our patent and trademark rights related to beta-alanine. Some of our patents extend as far as through 2036.

 

Licensing, royalties, raw material sales, and revenues we have received associated with the sale and licensing of beta-alanine under the CarnoSyn® and SR CarnoSyn® trade names were primarily related to the direct sale of the raw material beta-alanine and totaled $14.2 million in fiscal 2021. We incurred intellectual property litigation and patent compliance expenses of approximately $1.2 million during fiscal 2021 primarily in connection with our efforts to procure and protect our proprietary rights and patent estate. We expect to continue to incur these types of litigation and compliance expenses during fiscal 2022.

 

Employees

 

As of June 30, 2021, we employed 220 full-time employees in the U.S., three of whom held executive management positions. Of the remaining full-time employees, 35 were employed in research, laboratory and quality control, 14 in sales and marketing, and 168 in manufacturing and administration. From time to time we use temporary personnel to help us meet shorter-term operating requirements. These positions typically are in manufacturing and manufacturing support. As of June 30, 2021, we had eight temporary personnel.

 

As of June 30, 2021, NAIE employed an additional 97 full-time employees and 25 temporary employees. Most of these positions were in the areas of manufacturing and manufacturing support.

 

In response to COVID-19, the state of California has taken measures intended to expand the availability of workers’ compensation or to change the presumptions applicable to workers compensation measures. These actions may increase our exposure to workers’ compensation claims and increase our cost of insurance. Additionally, the federal Families First Coronavirus Response Act (“FFCRA”) expanded paid sick and family medical leave for employees affected by COVID-19. FFCRA covers the cost of this paid leave with refundable tax credits. We are experiencing a shortage of associates and applicants to fill staffing requirements at our U.S. manufacturing facilities due to the current labor shortage affecting manufacturing businesses. This has adversely affected the operating efficiency of our manufacturing facilities. The steps we have taken to address the labor shortage at our manufacturing facilities include hosting hiring events, paying retention bonuses, offering enhanced wages and paying referral bonuses.

 

Our employees are not represented by a collective bargaining agreement and we have not experienced any work stoppages as a result of labor disputes. We believe our relationship with our employees is good. We cannot assure this will continue in the future.

 

Seasonality

 

In addition to general economic factors, we are impacted by seasonal factors and trends, such as major cultural events and vacation patterns. We manufacture and sell products to customers that operate in many different countries throughout the world and these seasonal factors vary by region. Although we believe the impact of seasonality on our consolidated results of operations is minimal, our quarterly results may vary significantly in the future due to the timing of private-label contract manufacturing and CarnoSyn® and SR CarnoSyn® beta-alanine raw material orders. We cannot provide assurances future revenue trends will follow historical patterns. The market price of our common stock may be adversely affected by these seasonal factors.

 

Financial Information about Our Business Segments and Geographic Areas

 

Our operations are comprised of two reportable segments:

 

 

Private-label contract manufacturing, in which we primarily provide manufacturing services to companies that market and distribute nutritional supplements and other health care products.

 

 

Royalty, licensing, and raw material sales associated with the sale and license of beta-alanine under our CarnoSyn® and SR CarnoSyn® trademarks.

 

Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Australia, Asia, Mexico, and Canada. Our primary markets outside the U.S. are Europe and Asia. Our patent and trademark licensing activities are primarily based in the U.S.

 

For additional financial information, including financial information about our business segment and geographic areas, please see the consolidated financial statements and accompanying notes to the consolidated financial statements included under Item 8 of this report.

 

Our activities in markets outside the U.S. are subject to political, economic and other risks in the countries in which our products are sold and in which we operate. For more information about these and other risks, please see Item 1A in this report.

 

 

ITEM 1A. RISK FACTORS

 

When evaluating our business and future prospects, you should carefully review and consider the risks described below in conjunction with other information in this report and in other reports and documents we file with the SEC. The risks and uncertainties described below are not the only ones we face. Additional material risks and uncertainties, not presently known to us, or that we currently see as immaterial, may also occur or become material. If any of the following risks or any additional risks and uncertainties actually occur or become material, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our common stock could decline and our stockholders could lose all or a portion of the value of their investment in our common stock.

 

Risks Related to the Companys Industry and Business

 

The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our operations and business. 

 

While our facilities have been able to continue to operate, the global COVID-19 pandemic has caused disruptions in supply chains, affecting production and sales across a range of industries. While the disruptions are currently expected to be temporary, there is considerable uncertainty around the duration and the impact of these disruptions.

 

The extent of the impact of COVID-19 on our operational and financial performance will depend on the on-going and future impact of the pandemic on our customers, vendors, and availability of labor as well as the potential impact of future expanded local, state, or federal restrictions, all of which are uncertain and are difficult to predict.

 

Out of an abundance of caution with regard to the COVID-19 pandemic and to increase our liquidity in response to the unknown risk from the pandemic, its potential to have a material negative impact on our business and as a preventative measure to provide our business with the potentially needed additional liquidity resulting from such negative impact, we withdrew $10.0 million from our credit facility with Wells Fargo in the third quarter of fiscal 2020. On February 2, 2021 we repaid the entire withdrawal balance bringing our borrowings under our credit facility to zero. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain operational and our working capital and available credit facility will be sufficient for us to do so. However, there can be no assurance we will be able to obtain additional working capital in the amounts or in the timing that may become necessary, which could adversely affect our financial condition and results of operations.

 

A significant or prolonged economic downturn, could have, and at certain times in the past has had, a material adverse effect on our results of operations.

 

Our results of operations are affected by the level of business activity of our customers and licensees, which in turn is affected by the level of consumer demand for their products. A significant or prolonged economic downturn may adversely affect the disposable income of many consumers and may lower demand for the products we produce for our private-label contract manufacturing customers and products sold or manufactured by others using our licensed patent rights. Any decline in economic conditions in the U.S. and the various foreign markets in which our customers operate could negatively impact our customers’ businesses and our operations. A significant decline in consumer demand and the level of business activity of our customers, even if only due in part to general economic conditions, could have a material adverse effect on our revenues and profit margins.

 

Our industry is highly competitive and we may be unable to continue to compete effectively. Increased competition could adversely affect our financial condition.

 

The market for our products, and those of our customers, is highly competitive. Some of our competitors are larger than we are and have greater financial resources and broader name recognition than we do. Our competitors may be able to devote greater resources to research and development, marketing and other activities that could provide them with a competitive advantage. Our market has relatively low entry barriers and is highly sensitive to the introduction of new products that may rapidly capture significant market share. Our competitors may not stress the level of quality we provide and could manufacture with a lower level of quality at lower costs. Our competitors are largely private and not subject to the same disclosure requirements as a publicly traded company. If consumers do not perceive higher quality as worth a higher price, our revenue could suffer. Increased competition could result in price reductions, reduced profit margins or loss of market share, any of which could have a material adverse effect on our financial condition and results of operations. There can be no assurance we will be able to compete effectively in this intensely competitive environment.

 

Our business is subject to the effects of adverse publicity, which could negatively affect our sales and revenues.

 

Our business can be affected by adverse publicity or negative public perception about us, our competitors, our customers, our products, or our industry and competitors generally. Adverse publicity may include publicity about the nutritional supplements industry generally, the efficacy, safety and quality of nutritional supplements and other health care products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether these investigations involve us or the business practices or products of our competitors, or our customers. Any adverse publicity or negative public perception could have a material adverse effect on our business, financial condition and results of operations. Our business, financial condition and results of operations could be adversely affected if any of our products or any similar products distributed by other companies are alleged to be or are proved to be harmful to consumers or to have unanticipated and unwanted health consequences.

 

 

Risks Related to Operations, Manufacturing, and Technology

 

If we are unable to attract and retain qualified management personnel and key manufacturing personnel, our business may suffer.

 

Our executive officers and other management personnel along with key manufacturing positions are primarily responsible for our day-to-day operations. We believe our success depends largely on our ability to attract, retain and motivate highly qualified management and key manufacturing personnel. Competition for qualified individuals can be intense and has been increasing in recent years. We may not be able to hire additional qualified personnel in a timely manner or on terms that would not substantially increase our costs. Any inability to retain a skilled professional management team and manufacturing team could adversely affect our ability to successfully execute our business strategies and achieve our goals and objectives.

 

Our manufacturing and third party fulfillment activities are subject to certain risks.

 

We manufacture the majority of our products at our manufacturing facilities in California and Switzerland. As a result, we are dependent on the uninterrupted and efficient operation of these facilities. Our manufacturing operations, including those of our suppliers, are subject to power failures, blackouts, border shutdowns, telecommunications failures, computer viruses, cybersecurity vulnerabilities, human error, breakdown, failure or substandard performance of our facilities, our equipment, the improper installation or operation of equipment, terrorism, pandemics (including COVID-19), natural or other disasters, intentional acts of violence, and the need to comply with the requirements or directives of governmental agencies, including but not limited to the FDA. In addition, we may in the future determine to expand or relocate our facilities, which may result in slowdowns or delays in our operations. While we have implemented and regularly evaluate various emergency, contingency and disaster recovery plans and we maintain business interruption insurance, there can be no assurance the occurrence of these or any other operational problems at our facilities in California or Switzerland would not have a material adverse effect on our business, financial condition and results of operations. Furthermore, there can be no assurance our contingency plans will prove to be adequate or successful if needed or our insurance will continue to be available at a reasonable cost or, if available, will be adequate to cover any losses that we may incur from an interruption in our manufacturing and distribution operations. We recently acquired a warehouse and distribution facility in Carlsbad, California, and plan to convert it into a dedicated high volume powder blending and packaging facility while also providing additional raw material storage capacity. There can be no assurance our conversion plans will be completed in a time period or at the cost we estimate, or that we will obtain sufficient business from our clients to effectively utilize the facility and our investment therein.

 

We outsource our beta-alanine fulfillment and distribution activities as well as certain manufacturing activities. The operation of the third party service provider’s facilities is subject to the interruption risk and other risks similar to those described above for our facilities and there can be no assurance these interruptions or any other operational problem at such third party’s facilities would not have a material adverse effect on our business, financial condition and results of operations.

 

If we or our private-label contract manufacturing customers expand into additional markets outside the U.S. or our or their sales in markets outside the U.S. increase, our business could become increasingly subject to political, economic, regulatory and other risks in those markets, which could adversely affect our business.

 

Our future growth may depend, in part, on our ability and the ability of our private-label contract manufacturing customers, to expand into additional markets outside the U.S. or to improve sales in markets outside the U.S. There can be no assurance we or such customers will be able to expand in existing markets outside the U.S. or enter new markets on a timely basis, or that new markets outside the U.S. will be profitable. There are significant regulatory and legal barriers in markets outside the U.S. that must be overcome to enter and operate in such markets. We will be subject to the burden of complying with a wide variety of national and local laws, including multiple and possibly overlapping and conflicting laws. We also may experience difficulties adapting to new cultures, business customs and legal systems. Our sales and operations outside the U.S. are subject to political, economic and social uncertainties including, among others:

 

 

changes and limits in import and export controls;

 

 

increases in custom duties and tariffs;

 

 

changes in government regulations and laws;

 

 

coordination of geographically separated locations;

 

 

absence in some jurisdictions of effective laws to protect our intellectual property rights;

 

 

changes in currency exchange rates;

 

 

economic and political instability; and

 

 

currency transfer and other restrictions and regulations that may limit our ability to sell certain products or repatriate profits to the U.S.

 

Any changes related to these and other factors could adversely affect our business, profitability and growth prospects. If we or our customers expand into additional markets outside the U.S. or improve sales in markets outside the U.S., these and other risks associated with operations outside the U.S. will likely increase.

 

The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion could adversely affect the results of our operations.

 

We buy our raw materials from a limited number of suppliers. During fiscal 2021, one of our suppliers, Lonza Group AG, represented more than 10% of our total raw material purchases. During fiscal 2020, another of our suppliers, Yasunaga Trading Company, LTD (Yasunaga), represented more than 10% of our raw material purchases. We currently purchase all of our beta-alanine for our CarnoSyn® and SR CarnoSyn® business from Yasunaga. Any disruption in their ability to source materials for or produce the amounts of beta-alanine needed to meet our requirements could have an adverse effect on our business.

 

 

The loss of any of our other major suppliers or of any supplier who provides us materials that are hard to obtain elsewhere at the same quality could adversely affect our business operations. Although we believe we could establish alternate sources for most of our raw materials, any delay in locating and establishing relationships with other sources could result in shortages of products we manufacture from such raw materials, with a resulting loss of sales and customers. In certain situations we may be required to alter our products or with our customer’s consent to substitute different materials from alternative sources.

 

A shortage of raw materials or an unexpected interruption of supply could also result in higher prices for those materials. We have experienced increases in various raw material costs, transportation costs and the cost of petroleum-based raw materials and packaging supplies used in our business. Increasing pricing pressures on raw materials and other products have continued throughout fiscal 2021 as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and the impact of COVID-19. We expect these upward pressures to continue through fiscal 2022. Although we may be able to raise our prices in response to significant increases in the cost of raw materials, we may not be able to raise prices sufficiently or quickly enough to offset the negative effects such cost increases could have on our results of operations or financial condition.

 

There can be no assurance suppliers will provide the quality raw materials needed by us in the quantities requested or at a price we are willing to pay. Because we do not control the actual production of these raw materials, we are also subject to delays caused by interruption in production of materials including but not limited to those resulting from conditions outside of our control, such as pandemics, weather, transportation interruptions, labor shortages, strikes, terrorism, natural disasters, and other catastrophic events.

 

In addition, our efforts to maintain or increase sales of CarnoSyn® and SR CarnoSyn® and related supply agreements are substantially dependent on the availability of the raw material beta-alanine and sales of beta-alanine or products incorporating beta-alanine. The availability of beta-alanine, and thus sales of such raw material and products using such material, could be negatively impacted by any shortages, interruptions and similar events described above, which could in turn adversely affect the amount of revenue and profit margin we earn from the sale of beta-alanine.

 

Risks Related to Customer Concentration

 

Because we derive a significant portion of our revenues from a limited number of customers, our revenues would be adversely affected by the loss of a major customer or a significant change in their business, personnel or the timing or amount of their sales to their customers and their orders from us.

 

We have in the past and expect to continue to derive a significant portion of our revenues from a relatively limited number of customers. During the fiscal year ended June 30, 2021, sales to our largest customer, The Juice Plus+ Company, were approximately 51% of our consolidated net sales. We cannot predict with any certainty if sales to Juice Plus+ will increase or decrease in the future. We also have one other private-label contract manufacturing customer that represented 14% of our consolidated net sales during this same time period.

 

Although no other customers represented more than 10% of our consolidated net sales, the loss of one of our largest customers, or other major customers, a significant decline in sales to any of our largest customers, a significant change in their business model or personnel, or in their ability to make payments when due, could materially and adversely affect our financial condition and results of operations. The timing of our customers’ orders is impacted by, among other factors, their marketing programs, their customer demand, seasonality, their raw material suppliers we are sometimes required to use, their supply chain management, their entry into new markets and their new product introductions, all of which are outside of our control. All of these attributes have had and are expected to have a significant impact on our business in the future.

 

Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales from both existing customers and new customers could require significant initial investments, which may or may not result in higher overall sales and improved financial results.

 

Our business strategy depends in large part on our ability to develop new product sales from both current and new customer relationships. These activities often require a significant up-front investment including, among others, customized formulations, compliance with a different regulatory schemes, product registrations, package design, product testing, pilot production runs, and the build-up of initial inventory. We may experience significant delays from the time we increase our operating expenses and make investments in inventory (and incur additional related carrying costs) until the time we generate net sales from new products or customers, and it is possible after incurring such expenditures we may not generate material revenue from new products or customers. If we incur significant expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results would be adversely affected.

 

We currently derive significant revenues and income from sales of beta-alanine and from licensing our patents. Our ability to maintain or grow our sales of beta-alanine and license revenue from our other patents is contingent on our ability to continue to defend our patents, and commercialize the sale of beta-alanine under our instant release CarnoSyn® patents and trademark and our sustained release SR CarnoSyn® patents and trademark.

 

We own multiple patents and trademarks related to the use of beta-alanine in food and nutritional supplements. A majority of our revenue and income from this segment is currently derived from activity related to licensing our patents and other intellectual property associated with instant release beta-alanine, sold under our trade name CarnoSyn®. We have five patents for this version of CarnoSyn®, of which the latest expires in 2026. Our patent and trademark licensing revenue increased from $12.6 million in fiscal 2020 to $14.2 million in fiscal 2021 in part due to recovery of the sports nutrition industry after the reopening of gyms and athletic facilities and activities in accordance with easing COVID-19 guidelines for such activities. There is no assurance we will be successful maintaining our historical CarnoSyn® instant release beta-alanine sales levels or growing future sales volumes with our remaining CarnoSyn® instant release patent estate. If we are not successful it could have a material adverse effect on our business, results of operations, and financial condition.

 

We believe SR CarnoSyn® is a superior delivery system for CarnoSyn® beta-alanine based on its sustained release profile that allows for increased daily dosing and improved muscle retention of carnosine. Our patents related to SR CarnoSyn® extend through 2036 and we believe the introduction of SR CarnoSyn® beta-alanine is an important step in the further commercialization of our patent estate. There can be no assurance we will be successful in getting the market to accept this new form of beta-alanine or that we will be successful launching new products utilizing SR CarnoSyn® beta-alanine.

 

 

Risks Related to Regulations

 

Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some markets and could increase our costs.

 

The manufacturing, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national and local governmental agencies in the U.S. and in other countries. For example, we are required to comply with certain GMP and incur costs associated with the audit and certification of our facilities. Failure to comply with governmental regulations may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by a governmental agency could materially adversely affect our ability to successfully market our products and services. In addition, if such governmental agency has reason to believe the law is being violated (for example, if it believes we do not possess adequate substantiation for product claims), it can initiate an enforcement action. Governmental agency enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action by a governmental agency could materially adversely affect our ability and our customers’ ability to successfully market and continue selling the products involved.

 

Before commencing operations or marketing our products in markets outside the U.S., we are routinely required to obtain approvals, licenses, or certifications from a country’s ministry of health or comparable agency. Approvals or licensing may be conditioned on reformulation of products or even may be unavailable with respect to certain products or product ingredients. We must also comply with product labeling and packaging regulations that vary from country to country. Furthermore, the regulations of these countries may conflict with those in the U.S. and with each other. The sale of our products in certain European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the European Union. The cost of complying with these various and potentially conflicting regulations can be substantial and could adversely affect our results of operations.

 

As a result of the COVID-19 pandemic, our operations have been subject to additional laws and regulations imposed by federal, state, and local governments primarily related to the ability of our employees to come to work and the safety measures that need to be in place in order for our facilities to remain operational. While we already had robust quality standards and procedures, we have had to constantly monitor these new regulations and implement additional procedures where necessary, including temperature checks, additional cleaning procedures, allowing administrative personnel to work remotely, etc. New or expanded regulations or our inability to continue operating as an essential business could adversely affect our results of operations.

 

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations, when and if adopted, would have on our business. They could include new or revised requirements or restrictions related to the safe operation of our facilities due to the pandemic, or for the reformulation of certain products to meet new standards, the recall or discontinuance of certain products, additional compliance costs or record keeping requirements, expanded or different labeling, and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our operations.

 

Possible new tariffs on imported goods from China and elsewhere could adversely affect our business operations.

 

The United States has implemented new and increased tariffs on a wide range of goods and materials imported from China and other governments, in addition to tariffs previously imposed. These goods may include products, applications, and ingredients we or our customers require for their products, including beta-alanine. Our ability to maintain or increase CarnoSyn® sales and licensing revenue depends on the availability of the raw material beta-alanine. In response, China and other governments have, or have announced plans to impose additional tariffs on certain American products if additional U.S. tariffs are imposed. Continuing or increased tariffs could have a material adverse effect on our customer’s businesses, the availability of beta-alanine, and the cost of other raw materials we use in our customer’s products. While it is difficult to predict whether or how existing and additional potential tariffs will be imposed, or how tariffs will impact our business, we believe the imposition of additional tariffs by the U.S. or other governments on products we or our customers offer for sale, or ingredients we use in the products we manufacture could adversely impact our offerings and our customers, and could have an adverse impact on the availability of raw materials we purchase including beta-alanine.

 

Such results could adversely impact our ability to license our patents and trademarks, our ability to sell beta-alanine, and our customers’ ability to compete in the market place, resulting in reduced demand for our products, and products we manufacture for our customers. Additional tariffs imposed by any government on beta-alanine could have an adverse impact on the price we have to pay for beta-alanine and the availability of beta-alanine. Any of these events could have a material adverse effect on our business and results of operations.

 

Risks Related to Litigation

 

We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely affect our operations.

 

We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. Additionally, the manufacture and sale of our products involves risk of injury to consumers from tampering by unauthorized third parties or product contamination. We could be exposed to future product liability claims that include, among others, assertions that: our products contain contaminants; we provide consumers with inadequate instructions about product use; or we provide inadequate warning about side effects or interactions of our products with other substances. Even if we were to prevail in any such claims, the cost of litigation and settlement could be significant.

 

 

We maintain product liability insurance coverage, including primary product liability and excess liability coverage. While we expect to be able to continue our product liability insurance, there can be no assurance we will in fact be able to continue such insurance coverage, or that such insurance coverage will be adequate to cover any liability we may incur, or that our insurance policies will continue to be available at a cost similar to our cost today, or even an economically reasonable cost.

 

Additionally, it is possible one or more of our insurers could exclude from our coverage certain ingredients used in our products. In such event, we may have to stop using those ingredients or rely on indemnification or similar arrangements with our customers who wish to continue to include those ingredients in their products. A substantial increase in our product liability risk or the loss of customers or product lines, or the failure of a customer to honor indemnification agreements could each have a material adverse effect on our results of operations and financial condition.

 

 

We may continue to incur significant costs in the course of creating and defending our intellectual property. We may be unable to protect our intellectual property rights or may inadvertently infringe on the intellectual property rights of others.

 

We possess and may possess in the future certain proprietary technology, trade secrets, trademarks, trade names, licenses, patents, and similar intellectual property. We may continue to incur significant patent and trademark litigation costs associated with creating and defending our intellectual property. During fiscal 2021, we incurred approximately $1.2 million in patent litigation and prosecution expense and expect these expenses to be between $0.5 million and $1.0 million during fiscal 2022. There is no assurance we will be able to create new intellectual property, protect our existing intellectual property adequately or that our intellectual property rights will be upheld. If as we have been in the past, we are again subject to legal proceedings seeking to invalidate our patent rights, such proceedings or the success of the efforts thereby could have a material adverse impact upon our financial condition and results of operations. Furthermore, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S. Additional litigation in the U.S. or abroad may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation, even if ultimately determined in our favor, could result in substantial additional costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition. If infringement claims are asserted against us, we may seek to obtain a license to use the claiming third party’s intellectual property rights. There can be no assurance such a license would be available at all or available on terms acceptable or favorable to us.

 

 

Risks Related to Insider Ownership and Corporate Structure

 

If certain provisions of our Certificate of Incorporation, Bylaws and Delaware law are triggered, the market for our shares may decrease.

 

Certain provisions in our Certificate of Incorporation, Bylaws and Delaware corporate law may discourage unsolicited proposals to acquire our business, even if such proposals would benefit our stockholders. Those provisions include one that authorizes our Board of Directors, without stockholder approval, to issue up to 500,000 shares of preferred stock having such rights, preferences, and privileges, including voting rights, as the Board of Directors designates. The rights of our common stockholders will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Any or all of these provisions could delay, deter or prevent a takeover of our company and could lower the price investors are willing to pay for our common stock and the number of investors willing to own our common stock.

 

Collectively, our officers and directors own a significant amount of our common stock, giving them influence over corporate transactions and other matters and potentially limiting the influence of other stockholders on important policy and management issues.

 

Our officers and directors, together with their families and affiliates, beneficially owned approximately 22% of our outstanding shares of common stock as of June 30, 2021. Approximately 16% of the outstanding shares of common stock are beneficially owned by Mark LeDoux, and his family and affiliates. Mr. LeDoux is our Chief Executive Officer and Chairman of the Board. As a result, our officers and directors, and in particular Mr. LeDoux, could influence such business matters as the election of directors and approval of significant corporate transactions.

 

Various transactions could be delayed, deferred, or prevented without the approval of stockholders, including the following:

 

 

transactions resulting in a change in control;

 

 

mergers and acquisitions;

 

 

tender offers;

 

 

election of directors; and

 

 

proxy contests.

 

There can be no assurance that conflicts of interest will not arise with respect to the officers and directors who own shares of our common stock or that conflicts will be resolved in a manner favorable to us or our other stockholders.

 

 

Risks Related to Future Acquisitions

 

We may pursue acquisitions of other companies that, if not successful, could adversely affect our business, financial condition and results of operations.

 

We may pursue acquisitions of companies we believe could complement or expand our business, augment our market coverage, provide us with important relationships or otherwise offer us growth opportunities. Acquisitions involve numerous risks, including the following:

 

 

potential difficulties related to integrating the products, personnel and operations of an acquired company;

 

 

failure to operate efficiently as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices;

 

 

diverting management’s attention from other daily operations of the business;

 

 

entering markets in which we have no or limited prior direct experience and where competitors in such markets have more experience and stronger market positions;

 

 

potential loss of key employees of an acquired company;

 

 

potential inability to achieve cost savings and other potential benefits expected from the acquisition;

 

 

an uncertain sales and earnings stream from an acquired company; and

 

 

potential impairment charges, which may be significant, against goodwill and purchased intangible assets acquired in an acquisition due to changes in conditions and circumstances that occur after the acquisition, many of which may be outside of our control.

 

There can be no assurance that acquisitions we may pursue will be successful. If we pursue an acquisition but are not successful in completing it, or if we complete an acquisition but are not successful in integrating an acquired company’s employees, products or operations successfully, our business, financial position or results of operations could be adversely affected.

 

 

General Risk Factors

 

Our operating results will vary. Fluctuations in our operating results may adversely affect the share price of our common stock.

 

Our net sales increased during fiscal 2021 as compared to fiscal 2020, and there can be no assurance our net sales will improve in the near term, or we will earn a profit in any given year. We experienced a net loss in fiscal 2020 and may incur losses in the future. Our operating results may fluctuate from year to year and/or from quarter to quarter due to various factors including differences related to the timing of revenues and expenses for financial reporting purposes and other factors described in this report. At times, these fluctuations may be significant. We anticipate generating positive net income in fiscal 2022, although there is no assurance we will be able to do so. Fluctuations in our operating results may adversely affect the share price of our common stock.

 

 

Our stock price could fluctuate significantly.

 

Stock prices in general can be volatile and ours is no different. The trading price of our stock may fluctuate in response to the following, as well as other, factors including but not limited to factors outside of our control:

 

 

broad market fluctuations and general economic and/or political conditions;

 

 

fluctuations in our financial results;

 

 

relatively low trading volumes;

 

 

future offerings of our common stock or other securities;

 

 

the general condition of the nutritional supplement industry;

 

 

increased competition;

 

 

regulatory action;

 

 

adverse publicity;

 

 

manipulative or illegal trading practices by third parties; and

 

 

our and our customers’ and suppliers’ products and other public announcements.

 

The market for our stock has historically experienced significant price and volume fluctuations. There can be no assurance that an active market in our stock will continue to exist or that the price of our common stock will not decline. Our future operating results may be below the expectations of securities analysts and investors. If this were to occur, the price of our common stock could decline, perhaps substantially.

 

From time to time our shares may be listed for trading on one or more foreign exchanges, with or without our prior knowledge or consent. Certain foreign exchanges may have less stringent listing requirements, rules and enforcement procedures than the Nasdaq Global Market or other markets in the U.S., which may increase the potential for manipulative trading practices to occur on such foreign exchanges. These practices, or the perception by investors that such practices could occur, may increase the volatility of our stock price or result in a decline in our stock price, which in some cases could be significant.

 

We may not be able to raise additional capital or obtain additional financing if needed.

 

It is possible our cash from operations could become insufficient to meet our working capital needs and/or to implement our business strategies. In such an event, there can be no assurance our existing line of credit would be sufficient to meet our working capital needs, if the line has any credit still available when needed. Furthermore, if we fail to maintain certain loan covenants, we may no longer have access to our credit line. Under the terms of our credit facility, there are limits on our ability to create, incur or assume additional indebtedness without the approval of our lender. Our credit line terminates in May 2024 and there is no guarantee we will be able to extend or renew this credit line on favorable terms or at all.

 

We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt, or for general corporate purposes. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses and potentially lowering our credit ratings. At any given time, it could be difficult for us to raise capital due to a variety of factors, some of which may be outside of our control, including a tightening of credit markets, overall poor performance of stock markets, and/or an economic slowdown in the U.S. or other countries, or in the businesses of our customers. There is no assurance we would be able to market such security issuances on favorable terms, or at all, in which case, if we did not have any alternate funds we might not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, respond to competitive pressures or meet unanticipated customer requirements.

 

Our inability to raise additional capital or to obtain additional financing if needed could negatively affect our ability to implement our business strategies and meet our goals. This, in turn, could adversely affect our financial condition and results of operations.

 

 

ITEM 2. PROPERTIES

 

This table summarizes our facilities as of June 30, 2021. We believe our facilities are adequate to meet our operating requirements for the foreseeable future.

 

Location

 

Nature of Use

 

Square
Feet

   

How Held

   

Lease
Expiration
Date

 

Vista, CA USA(1),(2)

 

Manufacturing, warehousing, packaging and distribution 

   

162,000

   

Leased

   

March 2024

 

Manno, Switzerland(3)

 

Manufacturing, warehousing, packaging and distribution

   

95,990

   

Leased

   

June 2024

 

Manno, Switzerland(4)

 

Warehousing

   

30,892

   

Leased

   

December 2023

 

Carlsbad, CA USA(5)

 

Corporate headquarters

   

20,981

   

Owned

   

N/A

 

Carlsbad, CA USA(6)

 

Powder filling, packaging, distribution and storage

   

54,154

   

Owned

   

N/A

 

 

(1)

This facility is used by NAI for its private-label contract manufacturing segment.

 

(2)

At this facility we use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for administrative functions.

 

(3)

This facility is used by NAIE in connection with our private-label contract manufacturing segment.

 

(4)

This facility is used by NAIE for additional warehouse storage.

 

(5)

We purchased the Carlsbad facility in March 2016.

 

(6)

We purchased this facility in August 2021, and are presently converting it into a dedicated high volume powder blending and packaging facility with additional raw material storage capacity.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, product liability, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters, even if unfavorable, will result in a material adverse effect on our business, consolidated financial condition, or results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect. An unexpected settlement expense or an unexpected unfavorable outcome of a matter could adversely impact our results of operations.

 

As of September 20, 2021, neither NAI nor NAIE were a party to any material pending legal proceeding nor was any of our property the subject of any material pending legal proceeding. We are currently involved in several matters in the ordinary course of our business.

 

There is no assurance NAI will prevail in any litigation matters or that litigation expenses will not be greater than anticipated.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock trades on the Nasdaq Global Market under the symbol “NAII.” Below are the high and low sales prices of our common stock as reported on the Nasdaq Global Market for each quarter of the fiscal years ended June 30, 2021 and 2020:

 

   

Fiscal 2021

   

Fiscal 2020

 
   

High

   

Low

   

High

   

Low

 

First Quarter

  $ 8.23     $ 6.52     $ 12.30     $ 8.20  

Second Quarter

  $ 10.99     $ 7.40     $ 9.36     $ 7.61  

Third Quarter

  $ 17.66     $ 10.60     $ 9.61     $ 5.15  

Fourth Quarter

  $ 18.20     $ 12.90     $ 7.43     $ 5.93  

 

Holders

 

As of September 17, 2021, there were approximately 195 stockholders of record of our common stock. On that same date, the last sales price of our common stock as reported on NASDAQ was $14.91 per share.

 

Dividends

 

We have never paid a dividend on our common stock and we do not intend to pay a dividend in the foreseeable future. Our current policy is to retain all earnings to provide funds for operations and future growth. Additionally, under the terms of our credit facility, we are precluded from paying a dividend while such facility is in place without a waiver from our lender.

 

Recent Sales of Unregistered Securities

 

During the fiscal year ended June 30, 2021, we did not sell any unregistered securities.

 

Repurchases

 

During the quarter ended June 30, 2021, we did not repurchase any shares of our common stock under our stock repurchase plan. Currently we have $3.2 million approved under the Plan for future purchases.

 

Equity Compensation Plan Information

 

The following table sets forth information regarding outstanding options and shares reserved for future issuance under our existing equity compensation plans as of June 30, 2021:

 

Plan Category

 

Number of Shares

to be Issued Upon

Exercise of

Outstanding

Options, Warrants,

and Rights

   

Weighted-

Average

Exercise Price

of Outstanding

Options,

Warrants, and

Rights

   

Number of Shares

Remaining Available

for Future Issuance

Under Equity

Compensation

Plans (Excluding

Shares

Reflected in Column

(a))

 
   

(a)

   

(b)

   

(c)

 

Equity compensation plans approved by stockholders

        $       608,227  

Equity compensation plans not approved by stockholders

    N/A       N/A       N/A  

Total

        $       608,227  

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to provide Item 6 disclosure in this Annual Report.

 

 

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion and analysis is intended to help you understand our financial condition and results of operations as of June 30, 2021 and 2020 and for each of the last two fiscal years then ended. You should read the following discussion and analysis together with our audited consolidated financial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors. You should carefully review the risks described under Item 1A and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to vary.

 

Executive Overview

 

The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 7, the financial statements and accompanying notes, and this report.

 

Our primary business activity is providing private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to two or three private-label contract manufacturing customers and subject to variations in the timing of such customers’ orders, which in turn is impacted by such customers’ internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also includes raw material sales, royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® trademarks.

 

A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private-label contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.

 

During fiscal 2021, our consolidated net sales were 50% higher than in fiscal 2020. Private-label contract manufacturing sales increased 55% due to higher sales from a majority of our distribution channels worldwide. A significant portion of our increased contract manufacturing sales related to higher sales of immune and wellness products which is in line with the trend being experienced by the dietary supplement industry and is being driven by consumers taking a more active role in their health and wellness as a result of the COVID-19 pandemic.  Our contract manufacturing sales also increased due to sales of newly awarded products from new and existing customers. This sales increase was partially offset by a reduction in sales as a result of a discontinued customer relationship. Revenue concentration from our largest private-label contract manufacturing customer as a percentage of our total net sales increased to 51% in fiscal 2021 from 44% in fiscal 2020. We expect this percentage to decrease in fiscal 2022.

 

Effective March 31, 2020, we terminated our ongoing relationship with one private-label contract manufacturing customer, Kaged Muscle. During fiscal 2020 we reserved 100% of their accounts receivable and a majority of the inventory held for their products resulting in a total reserve of $4.3 million. During fiscal 2021, we recovered $0.8 million primarily associated with sales of inventory previously reserved. As of June 30, 2021, all remaining inventory amounts have been converted to accounts receivables and our balance sheet now includes a reserve of $3.5 million. We continue working with this former customer to assist them with completing their obligations to us.

 

During fiscal 2021, CarnoSyn® beta-alanine revenue increased 13% to $14.2 million as compared to $12.6 million for fiscal 2020. The increase in CarnoSyn® revenue was primarily due to an increase in material shipments primarily resulting from higher sales to existing customers, which we believe was primarily influenced by the increase in athletic activities as gyms and athletic facilities began to reopen during the second half of fiscal 2021 in accordance with easing COVID-19 guidelines for various cities and states across the USA. We believe the increase experienced in the second half of our fiscal year 2021 included larger than usual orders associated with our customer’s refilling their distribution channels and we anticipate these sales levels will normalize to historical trend in fiscal 2022.

 

We continue to invest in research and development for our SR CarnoSyn® sustained release delivery system. We believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets. We believe our efforts to refine our formulations and product offerings will be positively received and result in significant opportunity for increased SR CarnoSyn® sales.

 

To protect our CarnoSyn® business, we incurred litigation and patent compliance expenses of approximately $1.2 million during fiscal 2021 and $2.0 million during fiscal 2020. The decrease in these legal expenses on a year over year basis was primarily due to the successful resolution of several cases that were settled. We currently expect our litigation and patent compliance expenses to decrease during fiscal 2022 to an annual rate of approximately $0.5 million to $1.0 million. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, maintain our patent rights, the availability and the cost of the raw material when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, and continued compliance by third parties with our license agreements and our patent, trademark and other intellectual property rights. During fiscal 2022, we will continue our sales and marketing activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote and reinforce the features and benefits of utilizing CarnoSyn® and SR CarnoSyn® beta-alanine.

 

 

Based on our current sales order volumes and forecasts we have received from our customers, we anticipate our fiscal 2022 consolidated net sales will increase between 5.0% and 10.0% as compared to fiscal 2021. We also anticipate we will generate operating income between 7.0% and 9.0% of net sales for our fiscal year ending June 30, 2022. Sales and profitability during the first half of fiscal 2022 are anticipated to decline when compared to the same period of fiscal 2021. Our expectations for the first half of fiscal 2022 are being driven by continuing supply chain, labor and logistical constraints, all of which are expected to result in a backlog of existing orders that may not get fully cleared until the second half of fiscal 2022. We currently anticipate these manufacturing challenges will mostly resolve themselves during the second half of fiscal 2022. As a result, we expect sales and profitability in the second half of fiscal 2022 to exceed the comparable period in fiscal 2021, with the overall fiscal 2022 results reflecting an increase in both sales and profitability on a full year basis. There can be no assurance our expectations will result in the currently anticipated increase in net sales or operating income. Notwithstanding, we are also closely monitoring the impact of the COVID-19 pandemic. Currently, we cannot reasonably estimate the length of time or severity of the pandemic and cannot currently reliably estimate the impact this pandemic may have on our consolidated financial results for fiscal 2022 and beyond.

 

Impact of COVID-19 on Our Business

 

The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to affect our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Our facilities, located both in the United States and Europe, continue to operate as an essential and critical manufacturer in accordance with applicable federal, state, and local regulations, however, there can be no assurance our facilities will continue to operate without interruption. Factors that derive from COVID-19 and the accompanying response, and that have or may negatively impact sales and gross margin in the future include, but are not limited to the following:

 

 

Limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;

 

Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety;

 

Limitation on the availability of qualified individuals to adequately staff our manufacturing facilities;

 

Local, state, or federal orders requiring employees to remain at home;

 

Limitations on the ability of carriers to deliver materials to us or deliver our products to customers;

 

Limitations on the ability of our customers to conduct their business and purchase our products and services; and

 

Limitations on the ability of our customers to pay us on a timely basis.

 

We will continue to actively monitor the situation and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain operational and our working capital will be sufficient for us to remain operational even as the longer term consequences of this pandemic become known.

 

During fiscal 2022, we plan to continue our focus on:

 

 

Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and assist us in developing relationships with additional quality-oriented customers;

 

 

Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities, license and royalty agreements, and protecting our proprietary rights; and

 

 

Improving operational efficiencies and managing costs and business risks to improve profitability.

 

Discussion of Critical Accounting Estimates 

 

We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements.

 

Revenue Recognition — Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations.  For certain contracts with volume rebates, our estimates of future sales used to assess the volume rebate estimates are subject to a high degree of judgement and may differ from actual sales due to, among other things, changes in customer orders and raw material availability.

 

 

Results of Operations

 

The following table sets forth selected consolidated operating results for each of the last two fiscal years, presented as a percentage of net sales (dollars in thousands).

 

   

Fiscal Year Ended

                 
   

June 30, 2021

   

June 30, 2020

   

Increase (Decrease)

 

Private-label contract manufacturing

  $ 164,310       92

%

  $ 106,291       89

%

  $ 58,019       55

%

Patent and trademark licensing

    14,210       8

%

    12,585       11

%

    1,625       13

%

Total net sales

    178,520       100

%

    118,876       100

%

    59,644       50

%

Cost of goods sold

    148,078       83

%

    100,005       84

%

    48,073       48

%

Gross profit

    30,442       17

%

    18,871       16

%

    11,571       61

%

Selling, general & administrative expenses

    16,770       9

%

    20,380       17

%

    (3,610

)

    (18

)%

Income (loss) from operations

    13,672       8

%

    (1,509

)

    (1

)%

    15,181       1,006

%

Other (loss), net

    (1,547

)

    (1

)%

    (229

)

   

%

    (1,318

)

    (576

)%

Income (loss) before income taxes

    12,125       7

%

    (1,738

)

    (2

)%

    13,863       798

%

Provision (benefit) for income taxes

    1,357       1

%

    (93

)

   

%

    1,450      

%

Net income (loss)

  $ 10,768       6

%

  $ (1,645

)

    (1

)%

  $ 12,413       755

%

 

Private-label contract manufacturing sales increased 55% due to higher sales from a majority of our distribution channels worldwide. A significant portion of our increased contract manufacturing sales related to higher sales of immune and wellness products which is in line with the trend being experienced by the dietary supplement industry and is being driven by consumers taking a more active role in their health and wellness as a result of the COVID-19 pandemic.  Our contract manufacturing sales also increased due to sales of newly awarded products from new and existing customers. This sales increase was partially offset by a reduction in sales as a result of a discontinued customer relationship. Revenue concentration from our largest private-label contract manufacturing customer as a percentage of our total net sales increased to 51% in fiscal 2021 from 44% in fiscal 2020. We expect this percentage to decrease in fiscal 2022.

 

Net sales from our patent and trademark licensing segment increased 13% during fiscal 2021. The increase in patent and trademark licensing revenue was primarily due to an increase in material shipments primarily resulting from higher sales to existing customers, which we believe was primarily influenced by the increase in athletic activities as gyms and athletic facilities began to reopen during the second half of fiscal 2021 in accordance with easing COVID-19 guidelines for various cities and states across the USA. We believe the increase experienced in the second half of our fiscal year 2021 included larger than usual orders associated with our customer’s refilling their distribution channels and we anticipate these sales levels will normalize to historical trend in fiscal 2022.

 

The change in gross profit margin for the year ended June 30, 2021, was as follows:

 

   

Percentage
Change

 

Contract manufacturing(1)

    3.0  

Patent and trademark licensing(2)

    (1.8

)

Total change in gross profit margin

    1.2  

 

1

Private-label contract manufacturing gross profit margin contribution increased 3.0 percentage points in fiscal 2021 as compared to fiscal 2020. The increase in gross profit as a percentage of sales for private-label contract manufacturing is primarily due to a decrease in per unit manufacturing costs as a result of increased sales as well as a $1.0 million inventory reserve recorded in the prior fiscal year, with no such comparable reserve in the current fiscal year. These decreases were partially offset by unfavorable product and customer sales mix.

 

2

During fiscal 2021, patent and trademark licensing gross profit margin contribution decreased 1.8 percentage points in fiscal 2021 as compared to fiscal 2020. The decrease in margin contribution during the year ended June 30, 2021 was primarily due to decreased patent and trademark licensing net sales as a percentage of total consolidated net sales and lower average sales prices.

 

Selling, general and administrative expenses decreased $3.6 million, or 18%, during fiscal 2021 as compared to fiscal 2020. This decrease was primarily due to $3.3 million of bad debt expense recorded during fiscal 2020 related to a receivable from a former contract manufacturing customer with no such comparable reserve during fiscal 2021, decreased litigation and patent compliance expenses associated with our CarnoSyn® beta-alanine patent estate, and decreased CarnoSyn® advertising and research expenses. These decreases were partially offset by increased employee compensation costs.

 

Other income, net, decreased $1.3 million during fiscal 2021 as compared to fiscal 2020. The decreases were primarily due to the unfavorable foreign exchange revaluation activity due to volatility in the Euro and Swiss Franc impacting our balance sheet.

 

Our income tax expense increased $1.5 million during fiscal 2021 as compared to fiscal 2020. The increase was primarily due to the increase in income before taxes when compared to a loss in fiscal 2020.

 

 

Liquidity and Capital Resources

 

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facilities. Net cash provided by operating activities was $20.8 million in fiscal 2021 compared to net cash provided by operating activities of $3.7 million in fiscal 2020.

 

At June 30, 2021, changes in accounts receivable, consisting primarily of amounts due from our private-label contract manufacturing customers and our patent and trademark raw material sales activities, used $0.8 million in cash compared to using $4.3 million in fiscal 2020. The decrease in cash used by accounts receivable during fiscal 2021 primarily resulted from timing of sales and the related collections at the end of fiscal 2021 as compared to fiscal 2020. In addition, provision for uncollectible accounts receivable provided $0.1 million in fiscal 2021 as compared to using $3.3 million for fiscal 2020. The change in provision for uncollectible accounts receivable was primarily associated with a reserve recorded for a former contract manufacturing customer in fiscal 2020 while the activity in fiscal 2021 reflected an amount recovered against the same receivable. Days sales outstanding decreased to 36 days during fiscal 2021 compared to 51 days during fiscal 2020, primarily due to customer sales mix and timing of sales and the related collections.

 

Inventory provided $1.0 million in cash during fiscal 2021 compared to using $2.0 million in fiscal 2020. The change in cash activity from inventory was primarily related to the difference in amount and timing of sales at the end of fiscal 2021 and anticipated sales for the beginning of fiscal 2022 as compared to the same drivers at the end of fiscal 2020. Changes in accounts payable and accrued liabilities provided $1.9 million in cash during fiscal 2021 compared to providing $2.7 million during fiscal 2020. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory receipts and payments.

 

Cash used in investing activities in fiscal 2021 was $5.0 million compared to $4.5 million in fiscal 2020. Capital expenditures were $5.1 million during fiscal 2021 compared to $4.5 million in fiscal 2020. Capital expenditures during fiscal 2021 and fiscal 2020 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.

 

Cash used by financing activities in fiscal 2021 was $14.1 million, compared to providing $6.3 million in fiscal 2020. This change is primarily due to $10.0 million in proceeds from our line of credit, withdrawn as a measure to provide our business with liquidity out of an abundance of caution due to the COVID-19 pandemic during fiscal 2020 that was paid off in February 2021. Financing activities also included an increase in repurchases of our stock, which increased to $4.1 million in fiscal 2021 as compared to $3.7 million in fiscal 2020. At June 30, 2021 we had no outstanding balances due and $20.0 million available in connection with our loan facility. At June 30, 2020 we had $10.0 million due and no amount available in connection with our loan facility.

 

During fiscal 2021 we were in compliance with all of the financial and other covenants required under our Credit Agreement. Refer to Note F, "Debt," in Item 8 of this report, for terms of such Credit Agreement and additional information.

 

As of June 30, 2021, we had $32.1 million in cash and cash equivalents. Of these amounts, $15.6 million of cash and cash equivalents were held by NAIE. In August 2021 we used $7.5 million of cash related to the building purchase further disclosed in our subsequent events footnote. Overall, we believe our available cash, cash equivalents and potential cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2021, we did not have any significant off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons, in each case that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

 

Inflation

 

During fiscal 2021 we experienced price increases in product raw material and operational costs related to inflationary pressures. During fiscal 2020, we did not experience any significant increases in product raw material or operational costs we attributed to inflationary factors. We currently believe increasing raw material and product cost pricing pressures will continue throughout fiscal 2022 as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and the impact of COVID-19. We believe current inflation rates will have an impact on our fiscal 2022 operations and we are monitoring the drivers and working with suppliers and customers to mitigate the impact on our results.

 

Recent Accounting Pronouncements

 

A discussion of recent accounting pronouncements is included under Note A in the notes to our consolidated financial statements which are included under Item 8 of this report.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide Item 7A disclosure in this Annual Report.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and
Stockholders of Natural Alternatives International, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. (the “Company”) as of June 30, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 

 

Revenue RecognitionRefer to Note A to the Consolidated Financial Statements

 

Critical Audit Matter Description

 

The Company recognizes revenue upon transfer of control of promised products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company may enter into certain customer contracts that contain unique, customer-specific terms and conditions, variable consideration, as well as multiple performance obligations. For such contracts, significant interpretation may be required to determine the appropriate accounting, including the identification of performance obligations, the allocation of the transaction price to performance obligations in the arrangement, the timing of the transfer of control of promised goods for each of those performance obligations, estimates of variable consideration and agent versus principal consideration.

 

 

Our assessment of managements’ evaluation of the above referenced matters related to proper revenue recognition is significant to our audit because the amounts are material to the financial statements, the assessment process involves significant judgment, and the application of U.S. generally accepted accounting principles in this area is complex.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Our principal audit procedures related to the Company’s revenue recognition for customer contracts included the following:

 

 

We evaluated the appropriateness of management’s revenue recognition policies.

 

 

We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements.

 

 

We selected a sample of revenue transactions and performed the following procedures:

 

 

o

Obtained and read source documents for each selection, including master agreements, purchase orders and other documents that evidenced the customer arrangement.

 

 

o

Tested management’s identification and treatment of the key contract terms, including performance obligations and variable consideration.

 

 

o

Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of the Company’s accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

 

/s/ HASKELL & WHITE LLP

 

We have served as the Company’s auditor since 2014.

 

San Diego, California

September 20, 2021

 

 

 

Natural Alternatives International, Inc.

Consolidated Balance Sheets

As of June 30

(Dollars in thousands, except share and per share data)

 

   

2021

   

2020

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 32,133     $ 30,478  

Accounts receivable – less allowance for doubtful accounts of $3,527 at June 30, 2021 and $3,240 at June 30, 2020

    17,946       17,001  

Inventories, net

    27,006       27,972  

Income tax receivable

    1,095       848  

Forward contracts

          450  

Prepaids and other current assets

    2,168       2,275  

Total current assets

    80,348       79,024  

Property and equipment, net

    22,271       21,523  

Operating lease right-of-use assets

    15,877       18,354  

Deferred tax asset – noncurrent

    214       196  

Other noncurrent assets, net

    1,571       1,106  

Total assets

  $ 120,281     $ 120,203  

Liabilities and Stockholders Equity

               

Current liabilities:

               

Accounts payable

  $ 11,893     $ 12,509  

Accrued liabilities

    2,441       1,565  

Accrued compensation and employee benefits

    4,584       2,660  

Customer deposits

    1,721       62  

Income taxes payable

    619       1,010  

Forward contracts

    814        

Line of credit

          10,000  

Total current liabilities

    22,072       27,806  
                 

Long-term liability – operating leases

    16,481       18,782  

Noncurrent forward contracts

    4       195  

Long-term pension liability

    391       696  

Income taxes payable, noncurrent

    1,250       1,349  

Total liabilities

    40,198       48,828  

Commitments and contingencies (Notes H, J and M)

               

Stockholders’ equity:

               

Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding

           

Common stock; $.01 par value; 20,000,000 shares authorized at June 30, 2021 and June 30, 2020, issued and outstanding (net of treasury shares) 6,436,568 at June 30, 2021 and 6,752,372 at June 30, 2020

    88       87  

Additional paid-in capital

    29,456       27,992  

Retained earnings

    66,949       56,181  

Treasury stock, at cost, 2,567,797 shares at June 30, 2021 and 2,104,305 at June 30, 2020

    (15,849

)

    (11,702

)

Accumulated other comprehensive loss

    (561

)

    (1,183

)

Total stockholders’ equity

    80,083       71,375  

Total liabilities and stockholders’ equity

  $ 120,281     $ 120,203  

 

See accompanying notes to consolidated financial statements.

 

 

 

Natural Alternatives International, Inc.

Consolidated Statements of Operations And Comprehensive Income (Loss)

For the Years Ended June 30

(Dollars in thousands, except share and per share data) 

 

   

2021

   

2020

 

Net sales

  $ 178,520     $ 118,876  

Cost of goods sold

    148,078       100,005  

Gross profit

    30,442       18,871  

Other selling, general and administrative expenses

    16,902       17,098  

(Recoveries) provision for uncollectible accounts receivable

    (132 )     3,282  

Income (loss) from operations

    13,672       (1,509

)

Other (expense) income:

               

Interest income

    1       177  

Interest expense

    (118

)

    (67

)

Foreign exchange loss

    (1,409

)

    (320

)

Other, net

    (21

)

    (19

)

Total other (expense)

    (1,547

)

    (229

)

Income (loss) before income taxes

    12,125       (1,738

)

Provision (benefit) for income taxes

    1,357       (93

)

Net income (loss)

  $ 10,768     $ (1,645

)

Change in minimum pension liability, net of tax

  $ 350     $ (323

)

Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax

    272       (1,024

)

Comprehensive income (loss)

  $ 11,390     $ (2,992

)

Net income (loss) per common share:

               

Basic

  $ 1.71     $ (0.25

)

Diluted

  $ 1.69     $ (0.25

)

Weighted average common shares outstanding:

               

Basic

    6,290,689       6,695,302  

Diluted

    6,379,486       6,695,302  

 

See accompanying notes to consolidated financial statements.

 

 

 

Natural Alternatives International, Inc.

Consolidated Statements of Stockholders Equity

For the Years Ended June 30

(Dollars in thousands)

 

   

Common Stock

   

Additional
Paid-in

   

Retained

   

Treasury Stock

   

Accumulated
Other
Comprehensive

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Shares

   

Amount

   

Income (Loss)

   

Total

 

Balance, June 30, 2019

    8,851,677       87       26,280       57,380       1,626,605       (7,955

)

    292       76,084  

Issuance of common stock for restricted stock grants

    5,000                                            

Compensation expense related to stock compensation plans

                1,712                               1,712  

Repurchase of common stock

                            462,700       (3,747

)

          (3,747 )

Forfeiture of restricted stock

                            15,000                    

Cumulative-effect adjustment pursuant to adoption of ASU 2016-02 (Note D)

                      318                         318  

Reclassification pursuant to adoption of ASU 2018-02 (Note A)

                      128                   (128 )      

Change in minimum pension liability, net of tax

                                        (323 )     (323

)

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

                                        (1,024

)

    (1,024 )

Net loss

                      (1,645 )                       (1,645 )
                                                                 

Balance, June 30, 2020

    8,856,677     $ 87     $ 27,992     $ 56,181       2,104,305     $ (11,702 )   $ (1,183

)

  $ 71,375  

Issuance of common stock for restricted stock grants

    91,773       1       (1 )                              

Compensation expense related to stock compensation plans

                1,430                               1,430  

Repurchase of common stock

                            433,050       (3,844

)

          (3,844 )

Issuance of common stock for stock option exercise

    55,915             35             30,442       (303 )           (268 )

Change in minimum pension liability, net of tax

                                        350       350  

Unrealized gain resulting from change in fair value of derivative instruments, net of tax

                                        272       272  

Net income

                      10,768                         10,768  

Balance, June 30, 2021

    9,004,365     $ 88     $ 29,456     $ 66,949       2,567,797     $ (15,849 )   $ (561

)

  $ 80,083  

 

See accompanying notes to consolidated financial statements.

 

 

 

Natural Alternatives International, Inc.

Consolidated Statements of Cash Flows

For the Years Ended June 30

(in thousands)

 

   

2021

   

2020

 

Cash flows from operating activities

               

Net income (loss)

  $ 10,768     $ (1,645

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

(Recovery of) provision for uncollectible accounts receivable

    (132

)

    3,282  

Depreciation and amortization

    4,338       3,959  

Deferred income taxes

    (214 )     (893 )

Non-cash lease expenses

    3,421       2,772  

Non-cash compensation

    1,430       1,712  

Pension expense

    163       27  

(Gain) loss on disposal of assets, net of impairment

    (47

)

    109  

Changes in operating assets and liabilities:

               

Accounts receivable

    (813

)

    (4,319

)

Inventories

    966       (1,969

)

Operating lease liabilities

    (3,245

)

    (2,467

)

Prepaids and other assets 

    (358

)

    (1,174

)

Accounts payable and accrued liabilities

    1,912       2,720  

Forward contracts

    1,430       688  

Income taxes

    (737

)

    (156

)

Accrued compensation and employee benefits

    1,924       1,045  

Net cash provided by operating activities

    20,806       3,691  

Cash flows from investing activities

               

Purchases of property and equipment

    (5,107

)

    (4,541

)

Proceeds from sale of property and equipment

    68       35  

Net cash used in investing activities

    (5,039

)

    (4,506

)

Cash flows from financing activities

               

Repurchase of common stock

    (4,147

)

    (3,747

)

(Payments) borrowings on lines of credit

    (10,000

)

    10,000  

Issuance of common stock for stock option exercise

    35        

Net cash (used in) provided by financing activities

    (14,112

)

    6,253  

Net increase in cash and cash equivalents

    1,655       5,438  

Cash and cash equivalents at beginning of year

    30,478       25,040  

Cash and cash equivalents at end of year

  $ 32,133     $ 30,478  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Taxes

  $ 2,960     $ 993  

Interest

  $ 131     $ 66  

 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

 

A. Organization and Summary of Significant Accounting Policies

 

Organization

 

We provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. We also seek to commercialize our patent and trademark estate related to the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® tradenames through direct raw material sales and various license and similar arrangements.

 

Subsidiaries

 

On January 22, 1999, Natural Alternatives International Europe S.A., a Swiss Corporation (NAIE) was formed as our wholly-owned subsidiary, based in Manno, Switzerland. In September 1999, NAIE opened a manufacturing facility and currently possesses manufacturing capability in encapsulation, powders, tablets, finished goods packaging, quality control laboratory testing, warehousing, distribution and administration.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly-owned subsidiary, NAIE. All intercompany accounts and transactions have been eliminated. The functional currency of NAIE, our foreign subsidiary, is the U.S. Dollar. Certain accounts of NAIE have been translated at either current or historical exchange rates, as appropriate, with gains and losses included in the consolidated statements of operations.

 

Recently Adopted Accounting Pronouncements

 

We did not adopt any accounting pronouncements during the fiscal year ended June 30, 2021.

 

Recently Issued Accounting Pronouncements

 

On December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. This ASU will be effective for us beginning in our first quarter of fiscal 2022. We do not expect this ASU will have a material impact on our consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates ("IBORs") and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU can be adopted no later than December 1, 2022 (fiscal year 2023) with early adoption permitted. We do not expect this ASU will have a material impact on our consolidated financial statements.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

 

Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.

 

The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

Except for cash and cash equivalents, as of June 30, 2021 and June 30, 2020, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 assets and liabilities. The fair value of our forward exchange contracts as of June 30, 2021 included a net liability of $0.8 million. The fair value as of June 30, 2020 was a net asset of $0.3 million. The fair values were determined based on obtaining pricing from our bank and corroborating those values with a third party bank or pricing service. We classify any outstanding line of credit balance as a Level 2 liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of June 30, 2021 and June 30, 2020, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between any levels during fiscal 2021.

 

Accounts Receivable

 

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer credit-worthiness. An allowance for estimated doubtful accounts is maintained based on historical experience, including identified customer credit issues. We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible, we record the respective amount as a charge against allowance for doubtful accounts. To date, such doubtful accounts reserves, in the aggregate, have been adequate to cover collection losses.

 

Customer Deposits

 

For certain customers we have contract terms where the customer pays a certain portion of their orders as prepayment. We treat this as a customer deposit liability and do not record revenue until we ship the product to the customer. As of June 30, 2021 we had $1.7 million in customer deposits. As of June 30, 2020 our customer deposit balance was $0.1 million.

 

Inventories

 

We operate primarily as a private-label contract manufacturer. We build products based upon anticipated demand or following receipt of customer specific purchase orders. From time to time, we build inventory for private-label contract manufacturing customers under a specific purchase order with delivery dates that may subsequently be rescheduled or canceled at the customer’s request. We value inventory at the lower of cost (first-in, first-out) or net realizable value on an item-by-item basis, including costs for raw materials, labor and manufacturing overhead. We establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or net realizable value, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory, the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value.

 

 

Property and Equipment

 

We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated useful lives, generally ranging from 1 to 39 years. We amortize leasehold improvements using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Maintenance and repairs are expensed as incurred. Significant expenditures that increase economic useful lives of property or equipment are capitalized and expensed over the useful life of such expenditure.

 

Impairment of Long-Lived Assets

 

We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During fiscal 2021 we recognized $21,000 in impairment losses. We did not recognize any impairment losses during fiscal 2020.

 

Derivative Financial Instruments

 

We may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted sales denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts. To the extent we use derivative financial instruments, we account for them as cash flow hedges. Foreign exchange derivative instruments that do not meet the criteria for cash flow hedge accounting are marked-to-market through the Consolidated Statements of Operations and Comprehensive Income (Loss). Historically, our cash flow derivative instruments have met the criteria for hedge accounting.

 

We recognize any unrealized gains and losses associated with derivative instruments accounted for as cash flow hedges in income in the period in which the underlying hedged transaction is realized. To the extent the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time. As of June 30, 2021, we held derivative contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar, which is primarily the Euro. As of June 30, 2021, the notional amounts of our foreign exchange contracts were $60.4 million (€51.3 million). These contracts will mature over the next 14 months.

 

As of June 30, 2021, we held foreign currency contracts not designated as cash flow hedges primarily to protect against change in valuation of an underlying balance sheet item. As of June 30, 2021, the notional amounts of our foreign currency contracts not designated as cash flow hedges were $6.2 million (CHF 5.5 million). These contracts will mature in the first quarter of fiscal year 2022.

 

Defined Benefit Pension Plan

 

We formerly sponsored a defined benefit pension plan. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. The plan obligation and related assets of the plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries, through the use of a number of assumptions, determine plan obligations and annual pension expense. Key assumptions in measuring the plan obligations include the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.

 

Revenue Recognition

 

We record revenue based on a five-step model which includes: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price among the performance obligations; and (5) recognizing revenue as each of the various performance obligations are satisfied.

 

 

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, which is typically 30 days from the invoice date. Invoices are generally issued on the date of transfer of control of the products ordered to the customer.

 

Revenue is recognized at the point in time that each of our performance obligations is fulfilled, and control of the ordered products is transferred to the customer. This transfer occurs when the product is shipped, or in some cases, when the product is delivered to the customer.

 

We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers will take advantage of these early payment discounts. The cost of these discounts is reported as a reduction to the transaction price. If the actual discounts differ from those estimated, the difference is also reported as a change in the transaction price. We require prepayment from certain customers. We record any payments received in advance of contracts fulfillment as a contract liability and classified as customer deposits on the consolidated balance sheet.

 

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of June 30, 2021, we have no known returns liability.

 

We have an Exclusive Manufacturing Agreement with The Juice Plus+ Company LLC (“Juice Plus+”) through August 6, 2025. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within 24 countries where Juice Plus+ currently sells those products. Pursuant to this Exclusive Manufacturing Agreement, we provide Juice Plus+ with a cash discount. We recorded $1.6 million of “Cash Sales Discount” for the year ended June 30, 2021, which was recorded as a reduction to net sales. We recorded $1.6 million of “Cash Sales Discount” during the year ended June 30, 2020, with such amounts recorded as a reduction to net sales.

 

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $14.2 million during fiscal 2021 and $12.6 million during fiscal 2020. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $0.6 million during fiscal 2021 and $0.5 million during fiscal 2020.

 

Cost of Goods Sold

 

Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.

 

Shipping and Handling Costs

 

We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.

 

Research and Development Costs

 

As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not obligated to perform, certain research and development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products. We also direct and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific support for product claims and marketing initiatives.

 

Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal years ended June 30 were $1.9 million for fiscal 2021 and $1.8 million for fiscal 2020. These costs were included in selling, general and administrative expenses and cost of goods sold.

 

Advertising Costs

 

We expense the production costs of advertising the first time the advertising takes place. We incurred and expensed advertising costs in the amount of $0.8 million during the fiscal year ended June 30, 2021 and $1.4 million during fiscal 2020. These costs were included in selling, general and administrative expenses.

 

 

Income Taxes

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the Tax Cuts and Jobs Act (“TCJ Act”), and estimated income tax payments. We filed an amended return for our fiscal 2015 and fiscal 2016 tax years under provisions of the CARES act, as discussed below. We will continue to monitor and assess the impact of the CARES Act, and similar legislation in other countries, with respect to what impact such legislation may have on our business and financial results.

 

On July 23, 2020, the Department of Treasury issued final regulations which provide an exclusion to the global intangible low-taxed income (GILTI) calculation on an elective basis. These regulations were effective September 21, 2020 and may be retroactively applied. Under these new regulations, we are able to exclude the GILTI calculation from our domestic taxable income if the deemed effective tax rate at our foreign subsidiary is greater than 18.9%. We assessed this rate, including the implementation of certain tax strategies, and we have determined that our effective rate at NAIE is greater than 18.9% as of the year ended June 30, 2020. We reassessed our estimated taxes for fiscal 2020 and in the year ended June 30, 2021 we recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit. As a result of this adjustment, our domestic tax return for fiscal 2020 reflected a net operating loss which, in accordance with the CARES ACT, we carried back to fiscal 2015 and fiscal 2016, which reflected a higher federal tax rate. Due to this rate differential we have recorded a permanent discrete tax benefit of $0.3 million during the year ended June 30, 2021. For NAIE the result of this tax planning during the year ended June 30, 2021 was an additional foreign estimated tax benefit of $0.1 million.

 

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate that is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized as discrete items in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured and recorded using enacted tax rates for each of the jurisdictions in which we operate, and adjusted using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.

 

We account for uncertain tax positions using the more-likely-than-not recognition threshold. It is our policy to establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to the reserves. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2021 and June 30, 2020, we did not record any tax liabilities for uncertain tax positions.

 

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will ultimately be realized based on whether future taxable income will be generated during the periods in which those temporary differences become deductible. During the year ended June 30, 2021, there was no change to our valuation allowance.

 

Stock-Based Compensation

 

We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009 (the "2009 Plan"). The 2009 Plan expired on October 15, 2019. The Board of Directors approved a new omnibus equity incentive plan that became effective January 1, 2021 (the “2020 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on December 4, 2020. Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

 

We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have not paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.

 

We recognize forfeitures as they occur.

 

Use of Estimates

 

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). Actual results could differ from those estimates and our assumptions may prove to be inaccurate.

 

 

Net Income (Loss) per Common Share

 

We compute basic net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and restricted shares account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

 

   

For the Years Ended June 30,

 
   

2021

   

2020

 

Numerator

               

Net income (loss)

  $ 10,768     $ (1,645 )

Denominator

               

Basic weighted average common shares outstanding

    6,291       6,695  

Dilutive effect of stock options and restricted stock shares

    88        

Diluted weighted average common shares outstanding

    6,379       6,695  

Basic net income (loss) per common share

  $ 1.71     $ (0.25 )

Diluted net income (loss) per common share

  $ 1.69     $ (0.25 )

 

During the year ended June 30, 2021, we excluded shares relating to stock options totaling 22,500 and 52,108 shares of unvested restricted stock, as their impact would have been anti-dilutive.

 

In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of diluted net income (loss) per common share, as their inclusion would have an antidilutive effect. For the year ended June 30, 2020 we recorded a net loss for the year and therefore we excluded shares related to stock options totaling 130,000 and restricted stock totaling 323,904.

 

Concentrations of Credit Risk

 

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is primarily concentrated with our two largest customers, whose receivable balances collectively represented 64.8% of gross accounts receivable at June 30, 2021 and 65.7% at June 30, 2020. As of June 30, 2021, we had a receivable balance of $3.5 million and as of June 30, 2020 we had a receivable balance of $3.3 million from a former contract manufacturing customer. We have recorded a bad debt reserve equal to 100% of this outstanding balance and thus did not reflect it in the percentages listed above.

 

Additionally, amounts due related to our beta-alanine raw material sales were 8.6% of gross accounts receivable at June 30, 2021 and 2.5% of gross accounts receivable at June 30, 2020. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

 

 

B. Inventories

 

Inventories, net, consisted of the following at June 30 (in thousands):

 

   

2021

   

2020

 

Raw materials

  $ 20,668     $ 20,863  

Work in progress

    3,760       3,447  

Finished goods

    3,050       4,936  

Reserve

    (472

)

    (1,274

)

    $ 27,006     $ 27,972  

 

The inventory reserve as of June 30, 2020, included a reserve of $1.0 million related to Kaged Muscle while the inventory reserve as of June 30, 2021 did not include any amounts related to this former customer. During fiscal 2021, through our efforts working with this former customer, we recovered $0.8 million of the amount that was reserved during the year ended June 30, 2020 and the remaining inventory balance and related reserve was converted to accounts receivable and allowance for doubtful accounts.

 

 

 

C. Property and Equipment

 

Property and equipment consisted of the following at June 30 (dollars in thousands):

 

   

Depreciable Life

In Years

 

2021

   

2020

 

Land

 

NA

  $ 1,200     $ 1,200  

Building and building improvements

  7 39     3,757       3,743  

Machinery and equipment

  3 12     35,458       33,405  

Office equipment and furniture

  3 5     5,712       5,318  

Vehicles

    3       255       255  

Leasehold improvements

  1 15     20,236       18,031  

Total property and equipment

            66,618       61,952  

Less: accumulated depreciation and amortization

            (44,347

)

    (40,429

)

Property and equipment, net

          $ 22,271     $ 21,523  

 

Depreciation expense was approximately $4.3 million in fiscal 2021 and $4.0 million in fiscal 2020.

 

 

D. Leases

 

On July 1, 2019, we adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of July 1, 2019, which is the date of initial application. Under ASC 842, all leases greater than one year are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease expenses are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

 

We adopted ASC 842 using a modified retrospective approach for all leases existing at July 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. As of July 1, 2019, we had no finance leases. Upon adoption, leases that were previously classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $20.7 million to operating lease right-of-use assets and an adjustment of $20.9 million to the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 842, discounted using our secured incremental borrowing rate at the effective date of July 1, 2019, and using the expected lease term, including any optional renewals, as the tenor. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether existing contracts are or contain a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

 

Other information related to leases was as follows (in thousands) for the year ended June 30,

 

Supplemental Cash Flows Information

 

2021

   

2020

 

Cash paid for amounts included in the measurement of operating lease Liabilities

  $ 3,298     $ 3,453  

Operating lease liabilities arising from recording Right of Use Assets upon adoption of ASC 842

          20,897  

Operating lease liabilities arising from obtaining Right of Use Assets for new leases

    187       120  

 

We lease substantially all of our product manufacturing and support office space used to conduct our business. For contracts entered into on or after that effective date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period of the contract, and (3) whether we have the right to direct the use of the asset during such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

 

Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. Substantially all our operating leases are comprised of payments for the use of manufacturing space. We have no leases classified as finance leases. As of June 30, 2021, the weighted average remaining lease term for our operating leases was 6.3 years. The weighted average discount rate for our operating leases was 3.24%. As of June 30, 2020, the weighted average remaining lease term for our operating leases was 7.2 years. The weighted average discount rate for our operating leases was 3.24%.

 

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

 

 

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and other operating leases, we use our secured incremental borrowing rate.

 

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

 

Some of our manufacturing leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.

 

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

 

We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material.

 

E. Other comprehensive loss

 

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following at June 30 (dollars in thousands):

 

   

Year Ended June 30, 2021

 
   

Defined Benefit

Pension Plan

   

Unrealized

(Losses) Gains

on

Cash Flow

Hedges

   

Total

 
                         

Balance as of June 30, 2020

  $ (888

)

  $ (295

)

  $ (1,183

)

                         

OCI/OCL before reclassifications

    337       (2,817

)

    (2,480

)

Amounts reclassified from OCI

    123       3,173       3,296  
                         

Tax effect of OCI activity

    (110

)

    (84

)

    (194

)

Net current period OCI/OCL

    350       272       622  

Balance as of June 30, 2021

  $ (538

)

  $ (23

)

  $ (561

)

 

   

Year Ended June 30, 2020

 
   

Defined Benefit

Pension Plan

   

Unrealized

(Losses) Gains

on

Cash Flow

Hedges

   

Total

 
                         

Balance as of June 30, 2019

  $ (491

)

  $ 783     $ 292  
                         

ASU 2018-02 Adjustment

    (74

)

    (54

)

    (128 )

OCI/OCL before reclassifications

    (404

)

    1,400       988  

Amounts reclassified from OCI

    (20

)

    (2,747

)

    (2,759

)

                         

Tax effect of OCI activity

    101       323       424  

Net current period OCI/OCL

    (397

)

    (1,078

)

    (1,475

)

Balance as of June 30, 2020

  $ (888

)

  $ (295

)

  $ (1,183

)

 

 

 

F. Debt

 

On May 24, 2021, we entered into a new credit facility with Wells Fargo Bank, N.A. to extend the maturity for our working line of credit from November 1, 2022, to May 24, 2024. This new credit facility provides total lending capacity of up to $20.0 million and allows us to use the credit facility for working capital as well as potential acquisitions.

 

Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end (iii) net income after taxes not less than $1.00, determined on a trailing four quarter basis with no two consecutive quarterly losses, determined as of each quarter end. The credit agreement also includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $10.0 million for our fiscal year ending June 30, 2022 and $7.5 million for all fiscal years thereafter Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. There is an unused commitment fee of 0.125% required as part of this new credit facility.

 

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have credit approval with Wells Fargo Bank, N.A. which allows us to hedge foreign currency exposures up to 30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency exposures up to 24 months in the future.

 

On June 30, 2021, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

 

In light of the global economic uncertainty related to COVID-19 and as a preventative measure to provide our business with potentially necessary liquidity, and out of an abundance of caution, we withdrew $10.0 million from our credit facility with Wells Fargo during the year ended June 30, 2020. During February 2021 we fully repaid the entire balance of our $10.0 million credit line with Wells Fargo, bringing our debt under the line to zero. As of June 30, 2021, we had the full $20.0 million available for borrowing under our credit facility with Wells Fargo Bank.

 

G. Income Taxes

 

During fiscal 2021, we recorded U.S.-based domestic tax expense of $0.6 million. During fiscal 2020, we recorded U.S.-based domestic tax benefit of $0.8 million.

 

The following is a geographical breakdown of income (loss) before income taxes (in thousands):

 

   

2021

   

2020

 
                 

United States

  $ 7,462     $ (5,742

)

Foreign

    4,663       4,004  

Total income (loss) before income taxes

  $ 12,125     $ (1,738

)

 

The provision for income taxes for the years ended June 30 consisted of the following (in thousands):

 

   

2021

   

2020

 

Current:

               

Federal

  $ 274     $ 31  

State

    59       4  

Foreign

    1,238       728  
      1,571       763  

Deferred:

               

Federal

    44       (641

)

State

    211       (215

)

Foreign

    (469

)

     
      (214

)

    (856

)

Total provision (benefit) for income taxes

  $ 1,357     $ (93

)

 

 

Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):

 

   

2021

   

2020

 

Deferred tax assets:

               

Inventory capitalization

  $ 259     $ 412  

Inventory reserves

    143       301  

Pension liability

    150       260  

Lease liability

    2,477       2,732  

Net operating loss carry forward

    94       245  

Accrued compensation

    568        

Stock-based compensation

    96       157  

Forward contracts

    8       93  

Tax credit carry forward

    300       340  

Allowance for bad debt

    863       819  

Other, net

    3       246  

Total gross deferred tax assets

    4,961       5,605  
                 
                 

Deferred tax liabilities:

               

Withholding taxes

    (1,133

)

    (1,133

)

Fixed Assets

    (997

)

    (1,011

)

Foreign inventory reserves

          (469

)

Lease asset

    (2,413

)

    (2,681

)

Other, net

    (204

)

    (115

)

Deferred tax liabilities

    (4,747

)

    (5,409

)

Net deferred tax assets

  $ 214     $ 196  

 

At June 30, 2021, we had state tax net operating loss carry forwards of approximately $1.3 million. Under California Assembly Bill 85, effective June 29, 2020, net operating loss deductions were suspended for tax years beginning in 2019, 2020, and 2021 and the carry forward periods of any net operating losses not utilized due to such suspension were extended. Our state tax loss carry forwards will begin to expire in fiscal 2029, unless used before their expiration.

 

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years ended June 30, 2021 and June 30, 2020.

 

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2015 and forward are subject to examination by the U.S. tax authorities. Our tax years for the fiscal years ended June 30, 2017 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2020 and forward are subject to examination by the Swiss tax authorities.

 

NAIE’s effective tax rate for the fiscal year ending June 30, 2021 for Swiss federal, cantonal and communal taxes is approximately 16.5%. Excluding the discrete tax item recorded as part of the GILTI final regulations, NAIE’s effective tax rate for the year ending June 30, 2021 is 18.9%.

 

As part of the Tax Cuts and Jobs Act of 2017 (the Tax Act), we were required to recognize a one-time deemed repatriation transition tax during the fiscal year ended June 30, 2018 based on our total post-1986 earnings and profits (E&P) from our Swiss subsidiary, NAIE. This accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S. income tax on the amount. We no longer consider undistributed foreign earnings from NAIE as of December 31, 2017 as indefinitely reinvested. We consider earnings accumulated subsequent to December 31, 2017 as indefinitely reinvested.

 

 

A reconciliation of our income tax provision computed by applying the statutory federal income tax rate of 21% for fiscal 2021 and for fiscal 2020 to net income before income taxes for the year ended June 30 is as follows (dollars in thousands):

 

   

2021

   

2020

 

Income taxes computed at statutory federal income tax rate

  $ 2,546     $ (364

)

State income taxes, net of federal income tax expense

    189       (174

)

Permanent Differences

    (6 )     155  

Foreign tax rate differential

    (210

)

    (112

)

Tax credits

    (60

)

     

FDII export sales incentive

    (137

)

     

Stock based compensation

    (231

)

     

Global intangible low-taxed income (GILTI)

    28       402  
GILTI final regulations planning     (436 )      
CARES Act rate differential     (326

)

     

Income tax provision as reported

  $ 1,357     $ (93

)

Effective tax rate

    11.3

%

    5.4

%

 

The effective tax rate for the year ended June 30, 2021 was 11.3%. The effective tax rate for the year ended June 30, 2021 differs from the estimated U.S. federal statutory rate of 21% due primarily to the global intangible low-taxed income (GILTI) enacted as part of the Tax Act, and permanent differences, which primarily include discrete tax items related to stock option exercises and employee stock vesting. In comparison, the effective tax rate for the year ended June 30, 2020 was 5.4%. The effective tax rate for the year ended June 30, 2020 differs from the estimated U.S. federal statutory rate of 21% due primarily to the global intangible low-taxed income (GILTI) enacted as part of the Tax Act, and permanent differences, which primarily include discrete tax items related to employee stock vesting. We expect our U.S. federal statutory rate to be 21% for fiscal years going forward.

 

 

H. Employee Benefit Plans

 

401(k) Plan

 

We have a profit sharing plan pursuant to Section 401(k) of the Code, whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. All employees with six months or longer of continuous employment are eligible to participate in the plan. Under the 401(k) plan, we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation contributed to the plan. The total contributions under the plan charged to income from operations totaled $0.4 million for fiscal 2021 and $0.3 million for fiscal 2020.

 

We have a “Cafeteria Plan” pursuant to Section 125 of the Code, whereby health care benefits are provided for active employees through insurance companies. Substantially all active full-time employees are eligible for these benefits. We recognize the cost of providing these benefits by expensing the annual premiums, which are based on benefits paid during the year. The premiums expensed to income from operations for these benefits totaled $1.2 million for the fiscal year ended June 30, 2021 and $1.4 million for the fiscal year ended June 30, 2020.

 

Deferred Compensation Plan

 

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “Incentive Plan”). Pursuant to the Incentive Plan, the Human Resources Committee and the Board of Directors may make deferred cash payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI, (“Participants”). These Awards are made subject to conditions precedent that must be met before NAI is obligated to make the payment. The purpose of the Incentive Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.

 

The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors. The terms of each Award, including the amount and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that has not been done to date.

 

During the year ended June 30, 2021, we granted a total of $1.5 million in deferred cash awards to members of our Board of Directors and certain key members of our management team. Each deferred cash award provides for three equal cash payments to the applicable Participant to be paid on the one year, two year, and three year anniversaries of the date of the grant of such Awards, (the “Award Date”); provided on the date of each payment (the “Payment Date”), the Participant has been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee of NAI. In the event a Participant ceases to be an employee of NAI or a member of our Board of Directors prior to any Payment Date, no further payments shall be made in connection with the Award.

 

 

Defined Benefit Pension Plan

 

We formerly sponsored a defined benefit pension plan, which provides retirement benefits to employees based generally on years of service and compensation during the last five years before retirement. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. Annually, we contribute an amount not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 nor more than the maximum tax-deductible amount.

 

Disclosure of Funded Status

 

The following table sets forth the defined benefit pension plan’s funded status and amount recognized in our consolidated balance sheets at June 30 (in thousands):

 

   

2021

   

2020

 

Change in Benefit Obligation:

               

Benefit obligation at beginning of year

  $ 2,035     $ 1,615  

Interest cost

    39       46  

Actuarial loss

    (43

)

    380  

Benefits paid

    (211

)

    (6

)

Benefit obligation at end of year

  $ 1,820     $ 2,035  

Change in Plan Assets:

               

Fair value of plan assets at beginning of year

  $ 1,339     $ 1,369  

Actual return on plan assets

    294       (24

)

Employer contributions

    7        

Benefits paid

    (211

)

    (6

)

Plan expenses

           

Fair value of plan assets at end of year

  $ 1,429     $ 1,339  

Reconciliation of Funded Status:

               

Difference between benefit obligation and fair value of plan assets

  $ (391

)

  $ (696

)

Unrecognized net actuarial loss in accumulated other comprehensive income

    626       1,087  

Net amount recognized

  $ 235     $ 391  
                 

Projected benefit obligation

  $ 1,820     $ 2,035  

Accumulated benefit obligation

  $ 1,820     $ 2,035  

Fair value of plan assets

  $ 1,429     $ 1,339  

 

The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension plan was 2.74% for the year ended June 30, 2021 and 2.45% during the year ended June 30, 2020.

 

Net Periodic Benefit Cost

 

The components included in the defined benefit pension plan’s net periodic benefit expense for the fiscal years ended June 30 were as follows (in thousands):

 

   

2021

   

2020

 

Interest cost

  $ 39     $ 46  

Expected return on plan assets

    (59

)

    (69

)

Recognized actuarial loss

    110       50  

Settlement loss

    73        

Net periodic benefit expense

  $ 163     $ 27  

 

In the fiscal year ended June 30, 2021, we contributed $7,000 to our defined benefit pension plan. In the fiscal year ended June 30, 2020, we did not contribute to our defined benefit pension plan.

 

The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income (loss) (in thousands): 

 

   

2021

   

2020

 

Net (gain) loss

  $ (277 )   $ 481  

Settlement loss

    (73

)

     

Amortization of net loss

    (110

)

    (57

)

Plan expenses

           

Total recognized in other comprehensive (loss) income

  $ (460

)

  $ 424  

Total recognized in net periodic benefit cost and other comprehensive income

  $ (297

)

  $ 451  

 

 

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $34,000. We do not have any transition obligations or prior service costs recorded in accumulated other comprehensive income.

 

The following benefit payments are expected to be paid (in thousands):

 

2022

  $ 787  

2023

    109  

2024

     

2025

    323  

2026

    16  
2027-2031     345  

Total benefit payments expected to be paid

  $ 1,580  

 

The weighted-average rates used for the years ended June 30 in determining the defined benefit pension plan’s net pension costs, were as follows:

 

   

2021

   

2020

 

Discount rate

    2.74

%

    2.45

%

Expected long-term rate of return

    6.60

%

    6.50

%

Compensation increase rate

    N/A       N/A  

 

Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed to develop a risk free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.

 

Our defined benefit pension plan’s weighted average asset allocation at June 30 and weighted average target allocation were as follows:

 

   

2021

   

2020

   

Target
Allocation

 

Equity securities

    62

%

    52

%

    54

%

Debt securities

    25

%

    32

%

    43

%

Commodities

    12

%

    12

%

    0

%

Cash and money market funds

    1

%

    4

%

    3

%

      100

%

    100

%

    100

%

 

The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are available to meet the plan’s benefit obligations when due. Our investment strategy is a long-term risk controlled approach using diversified investment options with relatively minimal exposure to volatile investment options like derivatives.

 

The fair values by asset category of our defined benefit pension plan at June 30, 2021 were as follows (in thousands):

 

   

Total

   

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

   

Significant
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

 

Cash and money market funds

  $ 9     $ 9     $     $  

Commodities and other

  $ 172     $ 172     $     $  

Equity securities(1)

  $ 882     $ 882     $     $  

Debt securities(2)

  $ 366     $ 366     $     $  

Total

  $ 1,429     $ 1,429     $     $  

 

(1)

This category is comprised of publicly traded funds, of which 83% are large-cap funds, 10% are developed market funds, and 7% are emerging markets equity funds.

 

(2)

This category is comprised of publicly traded funds, of which 52% are U.S. fixed income funds and 48% are corporate and foreign market fixed income funds.

 

 

 

I. Stockholders Equity

 

Treasury Stock

 

On September 18, 2020, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan (“Repurchase Plan”), thus bringing the total authorized repurchase amount to $12.0 million. On March 12, 2021, the Board of Directors authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount to $15.0 million. Under the Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.

 

Treasury Stock repurchases for the year ended June 30, 2021 were as follows:

 

   

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